Examining financial dynamics through a focus on pensions is rarely scholars’ first inclination when it comes to discussions of financial power in emerging markets, and Latin America in particular. When one speaks of ‘finance’ the implicit connection is usually with ‘global’ and ‘private’. Indeed, while studies of agency in ‘global finance’ have become more prominent, the emphasis has usually been placed on the hectic behaviour of speculative international investors engaging in transactions that often elude regulatory oversight. These works have a common concern with short-term market movements, which are the most disruptive in crisis scenarios. Yet there is much relevant financial life in less glaring dynamics involving long-term oriented, public and private financial institutions that manage pensions. Often these are the largest institutional investors in domestic economies, market movers that have, to a large extent, remained neglected in analyses of financial power, particularly in Latin America.
In fact, pension funds are regulated actors that play an increasingly crucial role in domestic capital markets in developing countries, helping to finance not only sovereign debt, but also public and private enterprise, as well as – recently – a larger number of infrastructure and real estate projects. The focus on pensions emphasized here hence shifts the discussion of financial power from global private players often motivated by volatile strategies to largely domestic, also public, regulated actors with long-term investment horizons. That is not to say that pension management is uneventful. On the contrary, globally and as a product of disruptions from the financial crisis of 2007–8, private and public pension funds have recently been particularly targeted by government interventions because of various needs: sovereign debt and deficit financing in the midst of a credit drought, the further development of domestic capital markets in emerging economies, domestic investment in job-creating industries, ways to ease budgetary pressures brought about by ageing populations reliant on public sector pay-as-you-go schemes, and risk management techniques that can enhance the value of future pensions for those contributing to private pension accounts.
In Latin America, pension funds have grown significantly in the past 30 years as a result of pension reforms in the 1990s that instituted mandatory private pension fund contributions in some countries. Where the ‘privatization of pensions’Footnote 1 did not take place, governments have been keen on encouraging voluntary contributions to private pension accounts. Public and private pension funds are the largest institutional investors in Brazil, Chile and Mexico. In recent years, and as a result of lower interest rates and growing pension coverage needs, these funds have been slowly changing from being captive audiences for financing sovereign debt to becoming levers for politically salient domestic investment. Yet, despite being subject to similar macroeconomic pressures, the way the pension industry is organized in the continent varies in terms of the prominence of private versus public players, the degree of state intervention in their strategies, and the consequences of intervention. Therefore, the analysis of financial power in this context requires an acknowledgement of domestic market movers (unmatched in economic relevance by any other institutional investor), operating in distinct institutional environments where pension legislation and/or regulation has been ever changing (radically or incrementally). Finance and power, fundamentally heterogeneous categories in their own right, reveal in the case of pension funds in Latin America a variegated terrain that goes far beyond generalizations about financial fragility in the face of volatile international capital flows. Such flows, of course, are extremely relevant in our understanding of the power of finance in the region, yet they are only part of a landscape that is domestically both more plural and structurally more powerful than is usually assumed.
The focus here is on the three largest Latin American economies (Brazil, Mexico and Argentina), as well as the pension innovator in the region, Chile. The latter was the first country in Latin America to implement pension privatization under Pinochet in 1981, the first to expand former restrictions on pension fund investments abroad and the first to reform the private pension system without significantly undermining the breadth of the private pillar. Chile has served as a reference for pension privatization initiatives in the region and beyond, and is poised to remain a site for policy diffusion after its 2008 pension system revaluation and reform. These four countries illustrate the heterogeneity of financial pension arrangements in Latin America. Both Chile and Mexico implemented reforms that privatized a large part of the pension system. Brazil did not follow the same path, retaining a broad public pillar yet encouraging voluntary complementary pensions (private savings plans). Recently it has taken a significant step in the direction of privatizing part of its civil service pensions by directing civil servants to a new publicly managed pension fund operating under the logic of capitalization. Finally, Argentina reversed its 1994 pension privatization in 2008 and transferred pension savings under private management to a public fund managed by the National Social Security Administration (Administración Nacional de la Seguridad Social, or Anses in its Spanish acronym) in a radical move towards financial repression. In order to capture this diversity and track evolutionary patterns of relative convergence and marked divergence in pension finance, a new typology is suggested here. It departs from the Anglo-American notion of ‘pension fund capitalism’ (Clark Reference Clark2000) and further specifies pension finance as also revealing dynamics best described as ‘pension fund developmentalism’ and ‘pension fund statism’. The typology is not only aimed at capturing more empirical nuances in Latin America; it can also serve as a reference for cross-regional analyses, much as pension fund capitalism has inspired investigation and ‘translation’ beyond its original case studies.
A Typology of Financial Power in Pension Finance
Financial power in Latin America has generally been portrayed in the international political economy literature as the source of exogeneous pressures that significantly constrain domestic policy-making autonomy. The common analytical point of departure is one that assumes that global financial investors scrutinize government policy moves, often punishing (exiting) those that are not aligned with their preferences towards monetary stability and some degree of financial and trade liberalization (Hardie Reference Hardie2012; Mosley Reference Mosley2003). Therefore, financial liberalization constrains governments’ room to move, encouraging (some would say ‘forcing’) them in the same direction as International Monetary Fund conditionalities that emphasized fiscal austerity combined with privatizing and liberalizing strategies that ‘tilt the balance of power towards private monetary agents’ (Germain Reference Germain1997: 161).
A view from within, highlighting the constraints and opportunities faced by large domestic financial players, particularly pension funds, reveals a complementary yet different landscape in which these funds are increasingly functioning as levers for sovereign debt and domestic investment financing. This allows the state more leeway in pushing for projects that are politically salient and often strategically necessary (such as hydroelectric plants, roads and housing developments) without having to rely solely on foreign credit or inflationary sources of finance. These are dynamics that also speak to the broader and more visible efforts made by many emerging markets to increase macroeconomic self-reliance and insurance (Chin Reference Chin2010; Didier et al. Reference Didier, Hevia and Schmukler2012).
In the current international landscape of financial repression marked by lower interest rates, large domestic investors, or ‘captive audiences’, such as pension funds find themselves in need of pursuing broader investment diversification strategies (see Reinhart Reference Reinhart2012). Historically, Latin American pension funds have been heavily invested in sovereign bonds, yet returns from these securities are proving insufficient to help funds match the actuarial rates of return they are expected to deliver. For example, in Brazil, where historically high interest rates have been a developmental concern since the Real stabilization plan was successfully implemented in 1993, the basic interest rate (Selic) was 7.25 per cent by the end of 2012 – well below the 10 per cent and above rate that made domestic pension funds comfortable enough to invest a great majority of their assets only in fixed income (Revista Petros & Você 2013). Even with changes in US monetary policy (likely to be gradual), relatively lower interest rates put an emphasis on new varieties of foreign and domestic investments not previously systematically tapped into by pension funds. Domestic regulations are gradually adapting to this new reality. The new imperative for diversification is made even more significant, given the growth of pension funds operating in still relatively small domestic financial markets.
A more radical impact of financial repression on pensions was seen in Argentina. In 2008, alleging that the private pension funds instituted with the pension reform of 1994 were inefficient and public expenditures with pensions still high, the Argentine government of Cristina Kirchner nationalized all private pension funds, transferring individual accounts under their management to the public pensions agency, the National Social Security Administration. Since then, the National Social Security Administration and the Argentine central bank have become captive sources of debt financing amid ongoing international litigation with hold-out creditors from the 2005 and 2010 debt restructurings.
Before describing the particular dynamics illustrated in the case studies, it is worth clarifying why developing a typology for pension finance is important, beyond the potential methodological merits of conceptual innovation. As Woll (Reference Woll2014) argues in this issue, financial power is not simply a product of ‘superior resources’, but rather of a ‘long-term relationship between finance and the state’. What is crucial in this relationship, she explains, is the fact that the state needs finance, but finance also needs the state. Indeed, while this symbiotic relationship is almost universal, its variations in kind are at the root of quite different ‘varieties of capitalism’. Relevant financial actors are not necessarily only private players. Crucially, in emerging markets, they are also public ones. The necessary disaggregation of categories of power (external, structural, discursive) should also account for ‘microeconomic’ differentiation. That is to say, ‘finance’ is itself a heterogeneous category and so it matters which financial actors are exerting or losing power in which type of institutional scenario. A neat state–finance dichotomy is often unrepresentative of the type of blurred web of interests, influence and ownership found even in those economies that have embraced a significant degree of liberalization (Lazzarini Reference Lazzarini2011).
In Latin America, long-term investment was not a primary private concern, given prevailing macroeconomic conditions for so long characterized by high indebtedness and inflation. Monetary and some reasonable degree of fiscal stability are relatively recent phenomena. Financial strategies at home and abroad are, however, adjusting to this new reality. The growth of private pension funds is also a development of the post-stabilization period (which started in the 1990s but faced some bumps along the multiple crises of that decade). They are the quintessential local long-term investor. Because of such extended investment horizons, their ‘liability-driven investments’ can match states’ financing needs, most notably in infrastructure projects. Hence, pension funds are a particular kind of financial player whose demand for long-term investment options strengthens the symbiosis between the state, public and private ‘finance’ in a quite specific, yet far from uniform, way across countries. Although pension funds have been instrumental to the growth of corporate bond markets, the provision of development finance (Della Croce Reference Della Croce2012: 14) and the issuing of long-term domestic debt in most countries where they operate, the degree of state intervention in the countries studied here justifies a more varied typology of pension finance. The focus on pension funds in Chile, Mexico, Brazil and Argentina illustrates not only this heterogeneity of investment processes but, most importantly: (1) the extent to which the state and/or public agencies grow as financial actors (not simply playing a regulatory role); (2) how crucial sources of investment funding are being vigorously pursued among domestic institutional investors rather than tapped from abroad (an international trend, in fact); and (3) in the most singular case of Argentina, how financial repression has re-emerged as a tool for sovereign debt financing, now through pensions.
Pension Fund Capitalism
Economic geographer Gordon Clark used the term ‘pension fund capitalism’ to describe ‘the remarkable size and significance of public and private pension funds in the Anglo-American economies’ (Clark Reference Clark2000: ix). For him, pension funds are ‘an essential component’ in securities markets, responsible for the ‘incredible accumulation of capital pools’ that can substantially influence local markets (Clark et al. Reference Clark, Dixon and Monk2009: 4). They do so as consumers of financial products, promoters of financial innovation and supporters of the development of global financial flow management and accounting (Clark Reference Clark1998: 150). Importantly, pension funds significantly ‘affect the structure and performance of nation states and the global economy’ (Clark Reference Clark2000: ix; Clark et al. Reference Clark, Dixon and Monk2009). In fact, in this view, pension fund capitalism is both a product of the retreat of the state in financial institutions and a development that further undermines ‘the nation state’s status as a significant economic agent’ (Clark Reference Clark2000: 37). For Clark, the system of pension capitalization is not without risks, given its reliance on financial markets, yet it is a ‘viable political solution – at least as a supplementary form of provision to the withered state’ (Tickell Reference Tickell2003: 1382).
Insofar as (partial) pension privatizations became popular in emerging markets in the 1990s, the phenomenon that Clark describes can be seen as more encompassing than the cases he reports on, if one allows for institutional variation in the funds’ governance structure and local economic and political significance. Particularly in the cases of Mexico and Chile, recent efforts have been directed not only at relaxing regulatory limits for investments in foreign assets, but also at tapping into foreign money management expertise eager to cater to such large Latin American funds.
The discussion of some form of pension fund capitalism in Latin America may be justified if we understand the process to be still in its infancy and, crucially, not a mark of state retreat, but rather a form of guided management with varying degrees of direct intervention that may evolve, in some cases, into something more appropriately termed pension fund developmentalism.
Pension Fund Developmentalism
It is hence analytically fruitful to consider pension fund capitalism as a point in a continuum that also features a modified version of processes in which pension funds play a critical role as financial levers not in lieu of the state as a consequence of its retreat, but along with state interventionism in a collaborative engagement, elsewhere introduced as pension fund developmentalism (Datz Reference Datz2013).
Developmentalism is used here as a term linked to notions of ‘new developmentalism’, a strategy in which the state is ‘a key instrument to ensure economic development’ where ‘industrial policy continues to be necessary and growth is achieved through domestic rather than foreign savings’ (Bresser Pereira Reference Bresser Pereira2009: 12). This is distinct from the old developmentalism of the 1950s and 1960s in Latin America. Bresser Pereira (Reference Bresser Pereira2009) explains that, in the latter, import substitution and industrial policy were vigorously pursued. There prevailed a ‘mixed attitude in relation to budget deficits’, and a ‘relative complacency towards inflation’ (Bresser Pereira Reference Bresser Pereira2009: 12). Instead, new developmentalism is more concerned with export-led industrialization and a strong domestic market, along with a rejection of fiscal deficits and the commitment to fighting inflation. In this model, a strong state that provides support to private investment and nurtures a rapid expansion into external markets is a crucial component in a developmental strategy that relies on active fiscal and credit policies that can significantly improve economic growth rates (Morais and Saad-Filho Reference Morais and Saad-Filho2012: 792). In Brazil these dynamics are clearly at play since ‘the opening of the economy has not represented an eclipse of the state, nor has the widening of state activism provoked a collapse of the market or a retreat toward a closed economy’ (Arbix and Martin Reference Arbix and Martin2010: 6).
In this context, pension funds function as state allies, helping to finance domestic investments that are not only economically relevant but politically significant to governments in power. This is most evident when it comes to infrastructure investment.Footnote 2 Della Croce (Reference Della Croce2012: 9) explains that only in the last two decades have institutional investors ‘started to recognize infrastructure as a distinct asset class’. The long-term investment horizon of pension funds makes them ‘natural investors in less liquid, long-term assets such as infrastructure, often included in the alternative investments part of their portfolios’. These investments are expected to generate attractive yields, surpassing those obtained in the fixed income market, yet with potentially higher volatility. The accumulation of long-term savings in countries that have adopted private pension plans provides an opportunity to channel more financial resources to ‘underserved sectors’ (Della Croce Reference Della Croce2012: 9). Investments in infrastructure are certainly not only part of pension fund developmentalism; they are also well suited for the dynamics described under the rubric ‘pension fund capitalism’. Yet it is their role as part of the explicit developmental strategies that guide governments’ agendas and their direct or indirect intervention in pension management strategies that link these infrastructure investments to what we are here calling pension fund developmentalism.
In this sense, pension fund developmentalism offers a financial response to a set of crucial economic and political needs. Not only does it present investment diversification possibilities that match the need of pension funds beyond large allocations on sovereign bonds, but it also provides the state with crucial funding for the domestic investment it so desperately needs. This is most explicit in the case of Brazil, where domestic long-term investment has been elusive but is key to revamping now relatively stagnant economic growth and quelling forceful social demands for better infrastructure. The country’s largest pension funds are mostly linked to state-controlled companies and hence act not only as the largest domestic institutional investors, but also as public ‘connectors’ between the state and private capital (Lazzarini Reference Lazzarini2011).
Pension Fund Statism
Pension schemes worldwide were among the casualties of the 2007–8 global financial crisis. Many of them were reformed in attempts to reduce states’ deficits or to finance sovereign debts. The most radical reforms were those first embraced by Argentina in 2008.Footnote 3 President Cristina Kirchner’s team nationalized pension savings previously allocated to private pension funds, and transferred them to a public pension agency, the National Social Security Administration, which became solely responsible for the management of mandatory pension contributions. Pension fund statism was then set in motion. Through it, pension savings under public management reverse their potential contribution to domestic capital market development, and, crucially, render the public pension agency – through its large investment fund – one of the largest creditors of the government. That is because of the substantial amount of sovereign bonds transferred from the private pension funds’ portfolios to the public pension agency, which – along with the central bank – has become a veritable lever for sovereign debt financing. Financial repression in this case follows a radical version of a historical pattern (among advanced economies, in particular), taking advantage of domestic ‘captive audiences’, notably pension funds, as sources of credit in attempts to ‘liquidate debt’ (Reinhart Reference Reinhart2012). In Argentina’s case the strategy is also to gain time and autonomy to stay away from international bond markets amid lingering international litigation with hold-out creditors as the result of debt restructurings in 2005 and 2010.Footnote 4
A pension reform in 2007 (prior to nationalization) created an investment management committee linked to a new Public Fund for the Sustainability of the Public Pension System (the Fondo de Garantía de Sustentabilidad del Régimen Previsional Público de Reparto – or FGS). This fund became the financial arm of the public pension system and was ‘endowed’ with the assets previously managed by the extinguished private pension funds. Since its inception, it was instituted that up to 65 per cent of the public fund could be used in ‘public credit operations’, which have been a crucial part of the fund’s financial strategy. These operations are also a tool for the promotion of domestic investment in politically salient projects, such as subsidized housing. Given its acquisition of shares in many private companies, the public pension agency has also emerged as an active player in corporate governance.
In the case studies that follow, pension fund capitalism, developmentalism and statism are further contextualized.
Private Pension Funds in Chile and Mexico: Foreign Diversification And Domestic Investment Opportunities
Chile
Chile was the first Latin American country to adopt a pension system in 1924, and also the first to privatize part of it in 1981 under General Pinochet’s military rule (1973–90). The 1981 Chilean social security reform provided ‘a model that policymakers from other countries could use to craft similar reforms and, more importantly, demonstrate[d] the potential economic benefits of pension privatization’, many of which were not evident at the time of the reform, but became widely discussed by the end of the 1980s (Madrid Reference Madrid2003: 42). Particularly persuasive to policymakers around the world were expectations that pension privatization could boost domestic savings, allocate pension savings more efficiently and stimulate local capital markets. Indeed, in the Chilean case, privatization ‘channelled vast sums of money into the country’s capital markets, leading to the dramatic expansion and diversification of the domestic insurance industry, the growth of the Chilean stock market and the emergence of new financial instruments and intermediaries’ (Madrid Reference Madrid2003: 42).
The pension system instituted in Chile with the 1981 reform replaced a deficit-ridden pay-as-you-go (PAYG) regime with a capitalization system based on individual retirement accounts managed by private companies, pension fund administrators, known as Administradoras de Fondos de Pensiones (AFPs). Workers had the freedom to choose the fund administrator with which they wanted to be affiliated and could transfer their funds freely between them. When they retired, they could choose to buy an annuity or to withdraw their funds according to a predetermined plan.
Since its inception, the new Chilean retirement system has gone through a series of modifications, none more encompassing than the January 2008 reform, which sought to address the system’s limitations. The reform’s key feature was the significant expansion of the ‘solidarity pillar’, a non-contributory income benefit financed from general tax revenue that covers approximately 60 per cent of the older population (Inter-America Development Bank 2008). The reform also increased the percentage of salary represented by a pension (the replacement rate) from 44 per cent to 70 per cent, reduced the gap in size between pensions earned by men and women, included self-employed workers in the system, promoted greater competition between private pension funds (so as to produce a further reduction in fees) and established a more integrated institutional framework to run the pension system (Berstein Reference Berstein2011; Inter-America Development Bank 2008).
For the purposes of the discussion developed here, an important step in this reform also had to do with improving investment opportunities for the pension fund administrators (Chile’s largest institutional investors), as well as increasing responsibility on the part of each pension fund (rather than the public regulator) for investment choices. Although the average annual rate of return of private pension funds had been 9 per cent until 2008, the expectation was that such a rate was not sustainable in the future – hence the perceived need to promote more ‘flexibility and adaptability’ on the part of pension fund administrators facing changing market conditions. In this sense, although limits were maintained by investment category, the limit for foreign investment was raised substantially, totalling 80 per cent of pension fund administrators’ portfolios (Professional Pensions 2010a). The Chilean Superintendence of Pensions understood that the change was necessary, given the increase in assets under management by pension funds and the limited supply of investment opportunities at home. The same law (No. 20.255) also increased limits for derivative operations (Berstein Reference Berstein2011).
Since 2002, Chilean pension fund administrators have managed portfolios based on a system of multifondos (multifunds), divided into five categories (A to E) according to the portfolio’s risk level.Footnote 5 Minimum investment limits are defined in order to differentiate the five types of funds. The goal of such a system is to increase the expected value of pensions and investment options for contributors, who are free to choose from the different funds, apart from men above 55 years of age and women over 50 years, who cannot invest in Fund A except when they hold savings above a set amount. The multifund system has ‘helped the development of new instruments and made it possible for new issuers to emerge’ (OECD 2011: 13).
Chilean pension funds have been active investors in infrastructure, particularly since 1996 when Law 19.460 defined concession contracts and period, as well as third-party fund protection in infrastructure deals. In 1998 Chile created its first infrastructure bonds, which are debt instruments issued by the companies awarded public infrastructure concessions for transport (BBVA 2008; Delgado Reference Delgado2011). Pension funds subscribed to almost 100 per cent of the first lot issued. As the ‘motor’ of Chilean capital markets, pension funds have been crucial leaders in a growing pack of domestic and international investments in Chilean infrastructure projects that produce substantial revenue to the state (Romo Reference Romo2007). Moreover, pension fund administrators have also invested in the emerging industry of private equity mutual fundsFootnote 6 (Delgado Reference Delgado2011). The tendency is hence for pension funds to be central financial players in Chile’s financial market development in ways that reduce regulations that bind them to domestic investment only and also nudge the funds to be key contributors to relevant local projects.
Mexico
Similar to the Chilean experience, the government of President Ernesto Zedillo implemented reforms that privatized the Mexican pension system in 1995. These reforms, which came into effect in 1997, replaced the country’s pay-as-you-go system with one based on individual pension accounts managed by private pension fund administrators (Afores, in their Spanish acronym).Footnote 7 The state is still responsible for a minimum pension guarantee, a contribution to each worker’s pension account, oversight and enforcement of pension regulations. It also manages its own private pension fund administrator linked to the National Bank of Mexico (Banamex).
The number of contributions to Mexico’s now 13 private pension fund administrators increased substantially in a little over a decade: from 11.2 million pesos in December 1997 to 41.9 million pesos in March 2011 (Amafore 2013a). Consequently, assets invested by private pension fund administrators also grew, totalling US$149 billion or 12.3 per cent of Mexico’s GDP in 2012, double the amount recorded in 2003. As in Chile, these private pension funds are Mexico’s largest institutional investors. Despite international volatility, real returns (discounted for inflation) totalled 10.5 per cent in 2012, and the historical average since 2000 was recorded at 6.7 per centFootnote 8 (Amafore 2012). Private pension fund administrators are some of the main participants in long-term sovereign bonds, derivatives in Mexder, stocks and exchange-traded funds (ETFs) listed on the Mexican stock market, as well as recent initial public offerings (IPOs) and infrastructure-linked securities.
As in the case of the Chilean multifunds, the private pension fund administrators manage investment funds known as Siefores, divided into five specific groups by age and risk levels referred to as Siefores Basicas (or SB). Siefore Basica 5 (or SB5) invests on behalf of the youngest of contributors, 26 years old and younger, and is allowed to take on the most risk. By contrast, SB1 invests the savings of workers who are 60 and older, and has the most conservative portfolio, with a 66.9 per cent allocation of investment in Mexico’s government bonds (Amafore 2013b). The establishment of the five investment funds has been incremental, an attempt ‘to establish a life cycle system’ in which members pass from one investment line to another according to their age (International Financial Law Review 2012).
Recent changes in the administration of Mexican pension funds attempted to homogenize and regulate commission fees charged by the private pension fund administrators, as well as liberalize investment rules, expanding pension funds’ opportunities for asset allocation. Risk limits are set by the Siefores Basicas and have increased in the last couple of years with an emphasis on allowing the fund administrators to invest in a broader variety of assets such as commodities (up to 5 per cent of portfolios of SB2 and 13 per cent of SB4 since June 2012), private equity, infrastructure and housing (up to 5 per cent of the portfolio for SB2 and 10 per cent of SB3 to SB4) (Dirección Estratégica 2011; El Economista 2012). Another important development has been the authorization for private pension fund administrators to employ external managers to look after a portion of their investments since March 2011.Footnote 9 In practice, this has meant that external managers have been sought to coordinate investments in foreign equities in particular. The logic is to take advantage of the stronger Mexican peso to select foreign equity (a category that has been increasing in the private pension fund administrators’ portfolios) and use foreign expertise to allow pension funds to seek overall better returns (Financial Times 2011). Most of the foreign stocks purchased by these investors have been from the US. They are capped by the 20 per cent foreign investment limit in the pension funds’ portfolios.
Private equity, infrastructure and real estate investments are sought after by private pension fund administrators, and – in contrast – investments in sovereign bonds have decreased for the least conservative funds (the Siefore Basicas) as a result of decreasing interest rates relative to historical rates. Indeed, in just the past four years, Mexican pension funds have ventured in brand new directions. In 2009 new securities known as capital development securities (CKDs) allowed private pension fund administrators to invest in private equity for the first time. Capital development securities are a type of trust security designed to finance long-term public works, infrastructure, real estate and technological projects (Dirección Estratégica 2011).Footnote 10
In addition, 2010 was a year of first ventures. In January, seven private pension funds invested US$268.6 million in a fund linked to developing Mexican infrastructure (Macquaire Mexican Infrastructure Fund), the first peso-denominated fund focused on Mexican infrastructure projects. Private pension fund investments in Macquaire totalled 66 per cent of the fund’s total assets under management (Professional Pensions 2010b). In August of the same year, private pension funds bought into a local property fund, the first industrial venture of its kind for Mexican pension plans. The fund is intended to build a portfolio of industrial properties to be leased to Mexican and multinational corporations (Professional Pensions 2010c).
As they try to attract a larger group of contributors, according to the president of the private pension funds regulatory agency, the hope of Mexican officials is that ‘Afores will be on the frontline of financial innovation’. As the largest institutional investors in the country, Afores ‘have a large amount of money that has to be widely invested, but given Mexico’s current financial system, they are a big fish in a small pond’. This explains the funds’ attempts to find new investment opportunities. To those in the industry, ‘they have a crucial role in enhancing Mexico's financial development’ (Dirección Estratégica 2011).
Public Pension Fund Developmentalism in Brazil
Unlike some of its neighbours, Brazil did not privatize its pension system, although reforms were introduced in both the public and the increasingly more salient private pillar. The latter, which is the focus here, is made up of a complementary pension system composed of both a closed system of pensions managed by corporate pension funds instituted in 1977 and an open system managed by banks and insurance companies, a product of the Real Plan of 1994 and its monetary stabilization. Since 2000, the growth of complementary pensions has been substantial. They are managed by approximately 324 pension administrators (100 of which are public) (Previc 2013). In addition, the country has the ninth largest level of pension assets accumulation as a percentage of GDP after the US, the UK, Japan, the Netherlands, Canada, Switzerland, Australia and Germany. Brazilian pension assets occupy the first position among developing countries, totalling approximately US$340 billion (about 18 per cent of Brazil’s GDP) by the end of 2012, marking a significant increase from US$53 billion in 2002 (Towers Watson 2013).
Similar to expectations in Chile and Mexico, these numbers are poised to grow even more in Brazil. According to some estimates, assets managed by pension funds are likely to reach 24 per cent of GDP by 2018. Income growth, especially among lower-income populations, is driving this forecast for expansion, along with a new reform that has created a large public pension fund that will manage part of federal employees’ pensions, the FunprespFootnote 11 (Veja 2012).
The 2001 law reforming social security allowed an expansion of pension funds beyond firms and into the realm of professionals and civil servants. So far, the investment structure of these pension funds has been heavily tilted towards fixed income products, particularly public bonds. In 2011, they made up about 61 per cent of pension funds’ portfolio allocations while 30.1 per cent was invested in variable income (stocks and investment funds). A very small percentage of total investment is dedicated to foreign assets, and recently more attention has been given to investments in local corporations and real estate (Abrapp 2011). What may seem a small percentage of total assets, however, amounts to a large sum. For example, about US$6.5 billion was invested in real estate and US$10 billion in ‘emerging companies’ in 2011 alone. Moreover, what the data on investment allocations conceal is that about 20 per cent of pension funds’ portfolios is invested in infrastructure projects through equity and fixed income operations (BBVA Research 2011).
More than 40 per cent of assets managed by Brazilian pension funds are concentrated on three big funds owned by the employees of companies controlled by the government. Previ (out of the Bank of Brazil) is the largest pension fund in Latin America, with assets totalling around US$76.8 billion. Petros (out of Petrobrás, the Brazilian oil company) manages US$28.6 billion and Funcep (out of the national deposit bank, the Caixa Econômica Federal) manages US$23.5 billion (Abrapp 2011). Together, these three pension funds manage 45 per cent of the total assets accumulated by Brazilian private pension funds whose performance is reported by the Brazilian Association of Pension Funds, Abrapp.
As part of his campaign in support of associative pensions, former President Lula talked extensively to unions in 2003 and 2004, urging unionists to embrace a fresh view of the market in the face of contemporary capitalist transformations. Linking pension funds’ decisions to those that had the ‘national interest’ at heart and portraying the funds as ‘agents that promote domestic savings and help foster economic development by offering dignity to their participants’, as Lula put it, was one of the many rhetorical means to bring the funds closer to a strategy of investment that was in tune with the government’s priorities (quoted in Jardim Reference Jardim2009: 143–4). However, the interaction between the government and the pension funds was not free from political scandals. These funds were implicated in the mensalão corruption scandal of 2005 ‘due to faulty supervision by the Ministry of Social Security or because of political interests of some sectors of Lula’s Workers’ Party in gaining the support of congress to some government measures’ (Leopoldi Reference Leopoldi2006: 4–5). This led to the creation of congressional inquiry committees and later trial of those involved in the large scheme responsible for paying a kind of monthly salary to congressional representatives who voted for the government’s agenda.
In 2009 Resolution 3,792/2009 established by the National Monetary Council allowed pension funds to increase equity holdings from 50 to 70 per cent, provided that they bought stakes in companies listed on the Novo Mercado, a section of the São Paulo Exchange with stricter corporate governance rules. The resolution also enabled foreign investments to account for up to 10 per cent of pension fund portfolios (Professional Pensions 2011). However, there is a general perception that the best investment opportunities are to be found domestically, particularly when it comes to new infrastructure and real estate projects. This is a sign of change. In 2003 pension fund managers saw investing in infrastructure with medium- to long-term returns as a dubious proposition. Yet, with the decrease in the level of uncertainty regarding Brazil's macroeconomic performance, long-term investing has become a focus of public pension funds. The regulatory framework allowing pension funds to invest in infrastructure has been in place since 2007, when a new regulation (National Monetary Council Resolution 3.456/07) allowed investment in variable income up to 20 per cent of pension fund portfolios. Most commonly, that would translate into the acquisition of quotas for participation in investment funds dealing with logistics, railways, freeways, energy, sewage and gas distribution. This way the funds can be part of several projects without a high commitment to a single one, thus diversifying risk and allowing for constant financial flows derived from those investments to cover the payment of benefits falling due (Paixão and Pena Reference Paixão and Pena2007). As explained above, in an environment of decreasing interest rates, in recent years the search for more lucrative and diverse investment options has become imperative for pension funds that need to meet substantial actuarial rates (about 11 per cent annually, provided that inflation remains relatively low). Notable recent investments by pension funds involved highway concessions throughout the country, the Rio de Janeiro subway system, the new hydroelectric plant of Belo Monte and the privatization auction for the concession to manage the Guarulhos Airport in São Paulo for the next 20 years (Invepar 2011). In these infrastructure investments, the state is not only a partner of private actors, but also an investor with multiple ‘connectors’ to private companies through Previ, Petros and Funcef (Lazzarini Reference Lazzarini2011).
President Rousseff’s agenda of continuity with Lula’s policies applies to pension funds. She has declared that the government ‘is not likely to get infrastructure funding without the presence of pension funds, acting in a more notable manner’ (quoted in Valor Online 2010). Such funding is key, given Brazil’s highly visible preparations for hosting both the World Cup in 2014 and the Olympic Games in 2016.
Argentina’s Pension Fund Statism: Financial Repression and Centralization
Following the Chilean example, and as part of a large programme of market-oriented reforms, in 1993 the Menem government in Argentina privatized part of the pension system by instituting a new capitalization pillar managed by private pension fund administrators (Administradoras de Fondos de Jubilaciones y Pensiones – AFJPs).
In the midst of a worsening fiscal crisis in 2001, new pension policies were enacted which modified the value of benefits, contribution rates, investment rules for the funded scheme, pension fund fees and the funded scheme’s benefits. Private pension funds (holding mostly dollar-denominated Argentine debt) were tapped to ease debt obligations through different debt swap operations. The funds were made to accept a restructuring of US$32 billion (of which US$28 billion was accepted) of federal bonds for new bonds at lower interest rates and longer maturities. Because of this deal (known locally as the megacanje), Argentina avoided default in June 2001 (Machinéa Reference Machinéa2002). Soon after that, Minister Cavallo announced that the country’s pension deposits would be transformed into T-bonds or government-guaranteed loans (non-negotiable assets). Yet most local pension funds complained that the government was making them act against the best interests of their clients. Hence, the only fund that accepted the swap was the publicly managed Nación.
The turbulent summer of 2001 also led to the government’s conversion of dollar-denominated bonds into local currency (pesos) at the rate of 1.40 pesos per dollar (far less than the exchange rate prevalent at the time) and their indexation to inflation. Pension funds that did not accept the swap, and hence did not undertake the conversion, saw that, although there was value in accepting a peso conversion at 1.40 to the dollar plus inflation correction, there were no official guarantees that the deal would be final. If they accepted it, they would be holding performing bonds, which would not enter a future debt restructuring. Finally, in December 2001, just before the default, the government ordered the pension funds to transfer US$2.3 billion to the national treasury in exchange for treasury bills. This raised the total investments in government paper in pension funds’ portfolios to 62 per cent in that year, and would increase further in 2002 to 76 per cent (Kay Reference Kay2003).
On 14 January 2005, Argentina’s official debt exchange was finally put in place. On the first day of the restructuring, local pension funds subscribed to all issues of Cuasi-par (peso-denominated) bonds, which entailed less reduction in principal and were offered on a ‘first come first served’ basis, but tailored to attract domestic creditors (Clarín 2005).
Economic recovery followed, to the surprise of many analysts. A ‘benign global environment’ and the devaluation of the local currency helped increase exports, allowing Argentina to take advantage of the commodities boom. Because part of the restructured bonds that pension funds had acquired through the debt restructuring was indexed to GDP, the country’s economic growth proved profitable for these domestic bondholders. By November 2006 pension funds were again operating in an optimistic environment, managing 78.9 billion pesos or 12 per cent of Argentina’s GDP. At that time, about 54 per cent of their portfolios was concentrated in sovereign bonds.
On 14 February 2007 the Argentine Senate unanimously approved a new reform of the pension system, which allowed contributors to switch back to the public pillar. New entrants to the labour market who failed to opt for a specific pension system would be automatically enrolled in the public pillar (reversing the automatic enrolment of new workers into the private system that had been established in the privatization reform). The reform bill also reduced the commission that private funds could charge workers to a maximum of 1 per cent of their salaries, from about 3 per cent. Despite the government’s efforts to make the public pillar more appealing to contributors, about 80 per cent of pensioners chose to remain in the private systemFootnote 12 (La Nación 2007).
Nonetheless, on 20 November 2008, the Argentine Senate approved Law 26.425, creating a new integrated pension system and eliminating the capitalization system. At a time when overreliance on market mechanisms was still blamed for the traumatic 2001 crisis, it was no surprise that Cristina Kirchner’s government could count on broad political support from her fellow Peronists and even their opposition (Cronista 2008a). With the reform, the state guaranteed the 9.5 million contributors to the private funds that they would enjoy ‘the same or better savings and benefits’ than those the private system offered (Cronista 2008b). The government’s official justification for the elimination of private pension funds stressed that they had experienced a decrease in coverage and charged affiliates handsome commissions – which, however (as mentioned above) had been slashed to 1 per cent by Law 26.222 passed in 2007, and averaged 2.5 per cent through the lifespan of the private pillar (Bertranou et al. Reference Bertranou, Calvo and Bertranou2009; Clarín 2007). Also, for the Kirchner team, voluntary contributions did not exceed 0.3 per cent of the private pension funds’ total assets. The public pension agency still had to cover pension payments to those affiliates whose contributions were not enough to guarantee the minimal pension benchmark established by the state. Finally, the strongest case against the private pension fund administrators was the claim that they speculated with the savings of the country’s workers.
As a result of political turbulence at home and international market turmoil, despite average returns of 14 per cent a year,Footnote 13 Argentina’s pension funds lost 2.25 per cent on average in the 12 months ending in September 2008 as domestic stocks and bonds declined sharply (Reuters 2008). Given that with the 2007 reform most Argentines had not voluntarily switched back to the public system, the global crisis presented the government with a remarkable political opportunity for more radical change. Not only could private pension funds be blamed for low returns on investments that were – in the majority – in Argentine sovereign bonds (and hence responsive to investors’ perceptions and reactions to government policy), but also the reform could be rhetorically situated alongside interventionist moves by many other governments around the world (such as bailouts and stimulus programmes). Indeed, for President Cristina Kirchner, the crisis was evidence of ‘neoliberal failure’ (quoted in Cronista 2008c) and the pension reform ‘a strategic decision in this critical international turning point’ (quoted in Clarín 2008). It was politically easy to highlight the losses incurred by private pension funds while failing to make it explicit that 55 per cent of their portfolios was invested in public bonds at the time of the reform reversal (SAFJP 2008) and that their negative performance was related to a crumbling market (Cronista 2008d). That was the case, even though the pension fund administrators had grown weary of volatility in early 2008 and had begun to hold more cash, except – of course – for the assets invested in public bonds (Cronista 2008e).
Financial repression was then back in full force in Argentina. The fiscal impact of the 2008 reform was not only the sudden inflow of large sums of money from the private pension funds to the public sector (about 9.5 per cent of GDP), but also the relief of debt payments by the government to these very funds. The Argentine government was able immediately to incorporate US$313 million, the amount of money the government was due to pay the private pension funds for GDP-indexed bonds on 15 December 2008 (Cronista 2008f). As a consequence of the large transfer of sovereign bonds back to the public sector, the National Social Security Administration became one of the main creditors of the government and a key shareholder in local enterprises due to stocks that it ‘inherited’ from the private pension funds. As of 2013, the public pension agency, the National Social Security Administration, was a shareholder in 46 private firms (Anses 2013a). In two of them, the large media conglomerate, Clarín, and the manufacturer Siderar, the government has taken an active and contentious role in board meetings (Clarín 2011).
Most important has been the National Social Security Administration’s role in financing the sovereign debt. In July 2010, 80 per cent of the National Social Security Administration’s surplus was captured by the Treasury in return for more public bonds (Cronista 2010). This trend has continued. The National Social Security Administration’s budget for 2013 was 315 billion pesos and estimated expenditure was 289 billion pesos. The difference would help finance the deficit, along with money from the central bank and other public agencies (Obarrio Reference Obarrio2013). In March 2012, sovereign bonds represented 58.1 per cent of the total portfolio of the public fund and by the end of that year had climbed to 62 per cent (Anses 2013b). That is hardly a major change from the type of portfolio (heavily invested in these bonds) that the private pension funds held for most of their existence. The difference may lie in the fact that the public pensions investment fund (FGS) also invests about 13 per cent of its portfolio in the domestic economy through what are called ‘productive projects of infrastructure’ that ‘reinforce the role of the FGS in the financing of the real economy’ (Anses 2010: 3; Anses 2013b). These projects include: an atomic energy station, highways, a subway, hydro-development, thermoelectric plants and popular housing subsidies.
Although officials at the National Social Security Administration claim that, since the nationalization of private pension funds, the resources taken from the private sector and now under public management grew by 131.6 per cent (totalling about US$44 billion) by the end of 2012, the increase in investments in ‘public credits to the state’ have also risen considerably (Anses 2013b). While this may have been a lucrative strategy for the National Social Security Administration so far, it also promotes the dangerous convergence of sovereign risk and the risk to the solvency of the public pension system. This is all the more relevant as Argentina continues to have to deal with litigation by hold-out creditors in the US. How Argentina will repay the large sums that US courts may demand of it is not clear. The fate of this convoluted deal will determine sovereign bond prices, the profile of the Argentine debt and whether or not Argentina will return to issuing bonds in international markets. All these, in turn, may have a significant impact on pensions.
Conclusion
Finance is an unequivocally heterogeneous category. Yet, when it comes to Latin America, there has been a tendency to consider ‘financial power’ as mostly external, relatively homogeneous and usually constraining of domestic policy autonomy. Increasingly, however, when speaking of financial power in the region, an exclusive focus on foreign capital or domestic banks (many of which are part of large international conglomerates) misses a significant part of the empirical landscape, one inhabited by the largest institutional investors in Chile, Mexico and Brazil: domestic pension funds. In Argentina, the public agency responsible for the financial management of pensions is ubiquitous in the domestic macroeconomy.
No uniform picture of pension fund investments can be painted, however. Although subject to similar international pressures – marked most clearly by financial repression in advanced economies – the institutional design of pension fund management varies, particularly when it comes to ownership (public or private) and regulatory constraints.
The analysis of pension funds in Chile, Mexico and Brazil reveals public and private financial actors in similar phases of expansion, facing the challenges of diversification and expanding their presence in domestic productive sectors. In Chile and Mexico, the state operates as regulator, constraining overly risky behaviour but also – aware of growing needs to fund an ever-expanding pension market – delineating investment paths away from sovereign bonds and into international stocks, local private equity and securitized infrastructure investments. This is reminiscent of the ‘pension fund capitalism’ identified in the American and some European contexts. In Brazil, the role of the state is more pervasive. Given that the largest Brazilian institutional investors are the pension funds of government-controlled enterprises, the ‘structured investments’ part of these funds’ portfolios (beyond fixed and variable income) can be influenced by political pressures and connect these public actors (pension funds) with the private sector in increasingly more prominent deals that shape local pension fund developmentalism. In Argentina, self-inflicted financial repression through the nationalization of pension funds has originated the country’s brand of pension fund statism.
Particularly because their long-term horizons allow them to accommodate short-term volatility and to finance long-term investments that can indeed boost economic development, pension funds can operate as important (and rare) countercyclical financial actors – a relevant counterpoint to the oft-mentioned external power of financial capital to disrupt local economies through sudden waves of capital outflows. Pension fund statism via financial repression of the kind put in place in Argentina, in contrast, increases the procyclicality of pension savings, which become ever more attached to the market volatility affecting sovereign bonds, as well as the fate of a growing array of public projects and subsidized programmes.
Although scholarship in political economy acknowledges that ‘finance’ (broadly conceived) operates as a product of a symbiotic connection between state and capital, the assumption of a natural separation between the two can be misleading. Ultimately, analyses of ‘finance’ would benefit from more contextual understandings of the nature of agency and power, inviting, as a result, more analytical (as well as methodological) diversity. The typology for pension finance introduced here is a step in this direction
Acknowledgements
I am grateful to Michael Moran, Anthony Payne and the participants of the workshop ‘The Power of Finance Before and After the Great Financial Crisis’ at the University of Sheffield for their helpful comments.
