The transition in the Mexican pensions system to one based on individual defined contribution accounts has increased its financial sustainability | WPN World People News

The reforms to the pensions system in Mexico, especially the introduction of a system of individual defined contribution accounts, have significantly improved the system’s financial sustainability.

These reforms cover private-sector workers insured by the Mexican Institute of Social Security (IMSS), federal government employees insured by the Government Workers’ Social Security and Services Institute (ISSSTE) and certain other government agencies.

One challenge that remains is gradually to harmonise the rules for all pension plans, whether offered by the federal government, local government or universities, among other bodies, with the eventual aim of establishing a genuinely equivalent national pensions system for all Mexicans, according to the new OECD Review of the Pensions System in Mexico.

At the end of 2014, the system’s pension-backing assets amounted to roughly 14.1% of GDP. In only 17 years, Mexico ranked in the midrange of OECD countries. The OECD Secretary-General Angel Gurría also noted during the launch of the report in Mexico City that “institutionally, in line with common practice among OECD countries, CONSAR has been quite correct in its regulation and supervision of the system, which has made it possible for the pensions system in Mexico to be more efficient and become a tool that promotes inclusion and well-being.”

Nonetheless, challenges remain, and it is therefore necessary to continue to make improvements to ensure the survival of the system in the long term. In that regard, Mr Gurría commented that “the new system of defined contributions will be successful only if compulsory contributions are increased and a pro rata mechanism introduced to smooth the transition from the ‘old’ to the ‘new’ defined contribution pension system.”

Given that current contributions to the system are low, considering that it must guarantee an income level of more than 50% of a worker’s last salary, it will be important for those contributions to rise.

Significant challenges also lie ahead in relation to protection for seniors. The poverty rate among seniors in Mexico, who account for over 30% of the adult population, is the second-highest in the OECD, after Korea. In order to overcome this, the review proposes increasing the level of old-age assistance and highlights the importance of improving integration between the level of assistance, in other words pensions for seniors, and the minimum guaranteed pension.

The review also draws attention to the restrictiveness of the present investment system (based on specialised retirement fund investment companies known as SIEFOREs). Currently, workers have very limited options in the multi-funds system. Despite greater diversification, Mexico’s pension funds are still concentrated too heavily in debt instruments compared to other OECD countries.

The review states that more could be done to promote competition among private pension fund managers (AFOREs). Although the rates charged by AFOREs in Mexico have declined by more than 70 basis points over the past decade, they are still high by international comparison.

Source: Organization for Economic Co-operation and Development