Analysis: Peru pension funds take charge of reform agenda

Reuters News
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Posted: Jun 23, 2011 2:39 PM
Analysis: Peru pension funds take charge of reform agenda

By Caroline Stauffer

LIMA (Reuters) - Peru's privately-run pension funds are uniting to ward off any sweeping changes to the country's retirement system once proposed by President-elect Ollanta Humala.

Though the pension funds, with $30 billion in deposits, are the country's most important source of investment capital in one of the world's fastest-growing economies, they have been criticized for charging high fees to contributors and for signing up only 30 percent of all workers.

Fund managers say the system could be improved, especially if the government does more to bring in the large numbers of workers who toil in Peru's vast informal economy, but they dismiss any talk of nationalizing the system as foolish.

In his original campaign platform, Humala, a radical turned moderate leftist who will take office next month, proposed a mandatory, government-run pension system that would have effectively destroyed the funds, known as AFPs.

It would be the first substantial overhaul since the system was established in 1992 to get rid of an ineffective public system.

Faced with fierce criticism, Humala backed away from the plan prior to winning the June 5 election. He now proposes a more modest reform that would give a minimum public pension to all Peruvians over 65 who lack a private fund, similar to a reform Chile made in 2008.

Humala says this watered-down reform would leave the private system in place and only modestly add to the country's fiscal burden.

Still, skeptics fear his government might ultimately try to push for more far-reaching changes, even though the new Congress will be highly-fractured and Humala's party won't have a majority. AFPs are working to draw up their own reform package that they hope will appeal to the majority of legislators.

"The four different AFPs are in agreement and we hope the new Congress proposes something quickly -- the idea is to have talks in July and for something to be presented the first week of August," said Fernando Munoz, an adviser to the AFP Association.

One of the proposals the AFPs agree on would require self-employed workers to enroll in private plans. Wildcat miners, subsistence farmers and craftsmen work in the economy's informal sector, limiting the growth of AFPs.

Another proposal would eliminate fees based on a percentage of a worker's income and instead charge commissions based on assets held. A similar change implemented by Mexico reduced commissions by nearly 40 percent.

"Changes must take place this year. They have been delayed for too long," said Beatriz Merino, head of the country's association of private pension fund managers. "We hope that more Peruvians will have a pension."

PREEMPTIVE REFORM

Fund managers say preserving the heart of the current system is crucial for Peru, which historically has lacked deep pools of private capital to finance growth.

The AFPs have deposits equal to 20 percent of gross domestic product in Peru's surging economy.

Merino opposes any reform that would be similar to Argentina's nationalization of private pensions in 2008. In that move, the cash-strapped Argentine state took over private pension funds and created a new public system.

It expanded coverage to some 2 million more people, but thousands of retirees have since sued the state, discontent with their meager public retirement benefits.

Critics say public systems pose conflicts of interest for governments that could be tempted to borrow from retirement funds in lean budget times or require the funds to buy government bonds at sweetheart rates.

"It really puts the country on a bad fiscal path, which private pension reform was supposed to change in the first place by not putting everything on a public system," said John Pollner, an analyst at the World Bank in Washington.

The AFPs are quick to say they are driving economic growth by being the biggest investors in Peru's stock market and, to a lesser extent, by funding housing construction, infrastructure, and government bonds.

"Reform should be built over what already exists because the system has had good results and is fundamental for economic growth in Peru," said David Tuesta, chief economist for the pension unit of Spanish bank BBVA.

(Reporting by Caroline Stauffer; Editing by Terry Wade and Padraic Cassidy)