Vicente Corta Fernandez.

After five years in business, Mexico's pension fund industry is experiencing some acute growing pains. Retirement Fund Administrators (Afores), which now supervise more than 28 million individual retirement accounts, are under pressure from legislators and government watchdogs to rein in elevated commissions. Meanwhile, Afores have watched interest rates plummet on government-issued debt and are asking regulators to open new investment options, including foreign securities. It's an unpopular idea with some politicians who see a rapidly growing pension-fund balance of US$30 billion as a possible source of funding for developing industrial and public infrastructure projects at home.

The responsibility for guiding this fledgling pension sector through rough waters rests with the National Retirement Savings Commission (Consar) and its president, Vicente Corta Fernandez, who was appointed in April 2001. During an interview with BUSINESS MEXICO, Corta described recent efforts to provide workers with the freedom to transfer without bureaucratic delay among the market's 11 Afores. Striving to make Afores more competitive, Consar now publishes a ranking of funds by commissions directly on the authorization forms used by workers to change managers. Expressing a faith in educated consumers and an independent marketplace, Corta laid out proposals to open new private and foreign investment options, encourage more voluntary savings, and reduce the risk of financial losses.

Afores charge too much for managing the savings of Mexican workers, according to Mexico's Federal Competition Commission. Are market forces and the freedom to switch between fund managers enough to lower commissions?

We think that for this market to work properly, it's necessary for the participants, in this case the workers, to have the proper information to make educated decisions. The Mexican savings system is complicated and has failed to provide enough information. Because of this, we have now created an account balance calculator that is accessible over the Internet. We have a new format for transfers that makes it fairly easy to access succinct information in order to elect the Afore that works best.

The process we had before for changing managers was similar to the one we have now, only it left room for the Afores to be able to impede the transfer. Theoretically, the wait was three months, and it could take a year to change. Now, the change is initiated by the Afore that you want to move to. Once you have completed the requirements, the change is made in between 21 days and one month. Consar and the Afore have access to this information to be able to verify that it is done in the right way.

In terms of analyzing investment conditions, there is now information to make it possible to do it in a straightforward manner. We hope these measures will be enough to keep transfers flowing.

The difference in commissions is what demands the most attention. The difference between the least expensive commissions and the highest in the industry is about 115% (measured over a 25-year period). This gives us an idea of the importance of reducing commissions.

During the past year, we've had a reduction of about 5% in the average commission (measured over 25 years). The way Consar measures the performance of Afores and predicts future commissions and returns has generated complaints from Afores. Why? Competition didn't really exist before or it was very limited. We have to encourage the industry to be competitive. Some parts of the industry see this as a concern.

But, in general, I think many of the Afores are seeing this as an opportunity to grow.

Regarding the information that we're giving to the worker, I think nobody can question not only the right but also the obligation of the authorities to give simplified information to the worker.

We've set forth a methodology to ensure we're being impartial and that it wasn't directed at one Afore in particular. Some people have sought to put pressure on authorities so that the formula favors one group or the other, but we haven't changed anything.

If there were a proposal by the whole industry, we'd be happy to look at it.

Here in Mexico you can charge commissions on deposits, over the entire account balance, the return-on-investment or some combination of the three. It makes it very difficult to compare commissions. We can't assume the majority of the Mexican population is going to understand this (without projections).

What's your view of proposals to put a cap on commissions? Is it a threat to the retirement savings system that the Consar regulates?

I think Congress has resolved to not put a limit on commissions. Why not? When we started the discussion, what we were recognizing is that there hadn't been the optimal conditions for adequate competition. If there isn't adequate competition, then it's difficult to reduce these management costs. You have to let market forces act with the assumption that they can adjust costs and evaluate what other alternatives exist.

Regulating costs in this country has never worked. We've tried to regulate the cost of tortillas, to regulate many articles, and it has always been a disaster.

Therefore, I believe we need to look for market efficiencies, and if the market is not functioning in the optimal manner, we'll look at how to perfect it before considering a possible regulation of commissions.

Should the funds invested by Afores be used as a tool for national development? The most important benefit we have under the new pension system is that the worker has become the owner, the sole proprietor of his resources at the moment they enter an individual account. And nobody can touch that money, except the Afore, without his or her agreement.

The law governing the system of savings for retirement shows two objectives. One is to give the best possible pensions and the other is to contribute to the development of the country.

If at any given moment, there exists the need to choose between giving the best retirement and contributing to the nation's development, it has to be the better pension.

But the truth is these two goals are not at odds with each other. Both goals can be achieved.

One consequence of this investment is that resources that represent practically US$30 billion are being invested in the market and it is going to be helping the development of our country. And in fact, it's doing that right now.

But we shouldn't tolerate--not from the workers, nor Congress nor the private sector--the diversion of savings to pet projects.

The Mexican Association of Retirement Fund Administrators (Amafore) has said the recent decrease in interest rates and the return on government-issued debt makes it necessary to change the investment rules and investment options for Afores. Is the association right? What financial instruments are appropriate?

We are saying the same thing. We agree that with the interest rates dropping, there's a need to constantly revise the investment rules.

Until last year, the system hadn't seen any changes in the investment rules. Since last year it's been reformed on three occasions.

We have to be very cautious. An industry that invested mainly in government bonds isn't the same as an industry that now can invest in derivatives.

The first thing we did around October 2001 was to also initiate the creation of risk management units in all the Afores. You can't open up the investment rules if you don't have these precautions.

Now we've opened up the investment rules so the private debt limit, which before could represent only 35% of the portfolio, is up to 100%. Mexico is the only country in Latin America where investment in the private sector can be up to 100%.

They're going to be able to invest in derivatives. They can also now invest in European denominated instruments, or in dollar or yen denominated debt emitted not only by the federal government but also by Mexican corporations that have investment grade debt.

The next big change is to create a family of savings funds. In addition to choosing an Afore, you'll be able to choose which fund from this More to invest in. All the Afores are going to have two or three Siefores (Retirement Fund System Specialized Investment Companies) and you're going to decide where to go.

Are we going to see Afores investing in the Mexican stock market and foreign stock markets?

Investment in capital markets is always an integral part of a pension system. In Mexico, we're opening the investment structure very gradually and the conditions still don't allow us to open this kind of investment. Nevertheless, this doesn't mean there isn't a possibility that we won't evaluate it in the future.

There initially were 17 Afores. Now only 11 remain. Is Consar concerned that this may decrease competition? The truth is, no. It isn't a concern. There's a clause in the law that says a fund administrator can only control 20% of the market. With this number, we can have seven or eight funds administrators and still maintain competition.

The concentration of the industry also has its advantages. It allows for lower costs in order to compete and this can lower commissions.

In contrast to this trend of consolidation, we know there are at least two groups interested in soliciting a new license to have an Afore in Mexico.

It's possible we'll see the emergence of niche funds that cater to very specific segments of the population. This is also a consequence of the changes we made in the transfer rules. Before, you couldn't aspire to open a new Afore because you couldn't attract workers.

Morgan Lee is a Mexico City-based freelance writer and a correspondent for the Albuquerque Journal.