David Tuesta Chief Economist of Global Trends Unit Economic Research Department of BBVA FIAP

FIAP Warsaw 2009 11

David Tuesta

Chief Economist of Global Trends Unit

Economic Research Department of BBVA

FIAP

Warsaw, Poland

28 May, 2009

Asset prices in the economic cycle: a historic perspective

FIAP Warsaw 2009 22

Contents

Basic aspects for pension fund development

Demographics and economic structural variables

Size of Latin American pension funds

1

2

3 Current crisis impact on pension funds

4

Stock Exchange Markets

Developed vs. emerging countries

Short and long-term profitabilities

Regulations

Pension fund answers to the current financial crisis

5

Ageing pension funds

Portfolios allocation

Conclusion

FIAP Warsaw 2009 33

Demographics and economic structural variables are the main determinants of the current and future performance of pension

schemes

1 Basic aspects for pension fund development

Per capita GDP (constant US$)

Labor informality (% population

not covered by social security)

Labor legislation

Protectionism (index)

Population of 65 years old and over

Chile Colombia Mexico Peru

7,370 2,954 7,537 2,317

24% 49% 41% 71%

2005 8% 5% 6% 6%

2050 22% 18% 21% 16%

24 27 38 61

Source: BBVA ERD

FIAP Warsaw 2009 44

Contents




1

2


4




Regulations


5



Conclusion

FIAP Warsaw 2009 55

Since their creation, private pension funds in Latin America have grown continuously. The slope of the growth depends on

the parameters of each pension scheme, financial market development, maturity of the system, as well as social and

economic factors

Size of Latin American pension funds2

Chile

Colombia

Mexico

Peru

1995 2000 2004 2008

38% 42% 59% 61%

3% 5% 9% 16%

-.- 3% 5% 8%

3% 5% 10% 15%

Source: BBVA ERD

Private Pension Funds

(as a percentage of GDP)

FIAP Warsaw 2009 66

Mexico Peru Colombia Chile

11 15 15 27

6.5% 10% 11% 10%

8% 10% 7% 10%

56% 22% 27% 69%

Size of Latin American pension funds2

Private Pension Funds 2008

(as a percentage of GDP)

Maturity of Private schemes (years of existence)

Contribution rate

Labor force participation in mandatory private funds

Historical real return

Some variables that are fundamental for the size of private funds

8%15% 16%

61%

0%

20%

40%

60%

80%

Source: BBVA ERD

*

* Not included social quota

FIAP Warsaw 2009 77

Contents




1

2


4




Regulations


5



Conclusion

FIAP Warsaw 2009 8

Latam Stock MarketsJan 08 = 100

20

40

60

80

100

120

140

Jul-07

Aug

-07

Sep-

07O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb-

08M

ar-0

8Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep-

08O

ct-0

8N

ov-0

8D

ec-0

8Ja

n-09

Feb-

09M

ar-0

9Apr

-09

Argentina Brazil ChileColombia Mexico PeruVenezuela

Source: Bloomberg

Current crisis impact on pension funds3

The financial crisis not only affected developed countries but also Latin American markets

Asset prices registered a deep fall and regional investment reflected a bigger increase in country risk

Spread Embi (bp)

0

100

200

300

400

500

600

700

800

Jul-07

Aug

-07

Sep-

07O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb-

08M

ar-0

8Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep-

08O

ct-0

8N

ov-0

8D

ec-0

8Ja

n-09

Feb-

09M

ar-0

9Apr

-09

0

500

1000

1500

2000

2500

Brasil Chile

Colombia Perú

Mexico Argentina*

Venezuela*

Source: Datastream *Right side

FIAP Warsaw 2009 9


Pension funds have suffered from the crisis…

2008 pension fund nominal returns in selected countries (%)

Source: OECD

10,79,5

5,04,74,13,7

-0,3-0,4-0,9-1,3

-2,8-3,9

-6,1-6,4

-8,1-8,5

-10,2-10,5

-11,6-12,9-13,1

-14,0-14,0-14,3-14,4

-16,2-16,3

-18,0-18,0-18,4-19,0-19,5-19,9

-21,6-23,4

-30,2-35,0

-40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15

EgyptTurkeyAlbania

ColombiaKorea

Costa RicaMexico

ThailandGreece

Czech RepublicKenya

ItalyGermany

Slovak RepublicSpain

NorwayMacedonia

SwitzerlandPortugalAustriaIceland

DenmarkSwedenPoland

United KingdomFinland

HungaryNetherlands

BelgiumAustralia

JapanCanada

LithuaniaBulgaria

United StatesHong Kong

Ireland

FIAP Warsaw 2009 10


However, the pension funds of developed countries have been the most affected because of their high equity

exposure

Source: OCDE Global Pension Database

France

Sweden

Chile

100

80

60

40

20

020 40 60 80 100 120 140 160

United StatesCanada

UK

Asset

Allocati

on

(%

eq

uit

ies a

nd

mu

tual fu

nd

s)

Total Pension Assets (% GDP)

Netherlands

SwitzerlandDenmark

Australia

South Africa

Ireland

Finland

Japan

Mexico

Germany

Pension Plan Assets by Country, end 2007

The biggest Latin American pension funds, Mexico (persons) and Chile (assets), have been affected as well,

but to a lesser degree

FIAP Warsaw 2009 11

Colombia: Net Yield(pesos bn)

-4

-3

-2

-1

0

1

2

3

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-08

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Chile: Net Yield(Real pesos bn)

-8000

-6000

-4000

-2000

0

2000

4000

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-08

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mexico: Net Yield(pesos bn)

-60

-40

-20

0

20

40

60

80

100

120

ene-

08

feb-

08

mar

-08

abr-

08

may

-08

jun-

08

jul-08

ago-

08

sep-

08

oct-

08

nov-

08

dic-

08

ene-

09

feb-

09

mar

-09

Yields of Latin American

countries have been affected

but others have earned profits


Peru: Net Yield(New Soles bn)

-10

-8

-6

-4

-2

0

2

4

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-08

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

FIAP Warsaw 2009 12


Source: BBVA ERD

*February 2009 Data

Period Net Yields of Commissions(bn pesos December 2007)

0

1

2

3

4

5

6

7

8

9

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

ColombiaPeriod Net Yields of Commissions

(bn pesos December 2007)

-15000

-10000

-5000

0

5000

10000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: BBVA ERD

*February 2009 Data

Chile

Source: BBVA ERD

*February 2009 Data

Period Net Yields of Commissions(bn new soles December 2007)

-15

-10

-5

0

5

10

15

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Peru

Source: BBVA ERD

*March 2009 Data

Period Net Yields of Commissions(bn pesos December 2007)

-10

0

10

20

30

40

50

60

70

80

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Mexico

Net yields of commissions have been

affected but almost all have earned profits

FIAP Warsaw 2009 13


The long-term yields have not been affected in Latin American

31.1%

31.1% (2008)

33.5% (2007)

Colombia

Source: BBVA ERD

*February 2009 Data

Thus, regardless of the “minusvalías”, the value of the net yields of commissions still register an important long-term growth:

Breakdown of Administration Resources Balance


-

10

20

30

40

50

60

70

80

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Accumulated netyields of commissions

Period netcontributions

Initial balance

FIAP Warsaw 2009 14



-

10.000

20.000

30.000

40.000

50.000

60.000

70.000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009



Initial balance


24.3%

24.3% (2008)

31.7% (2007)

Source: BBVA ERD

*February 2009 Data

Chile



FIAP Warsaw 2009 15


27.6%

Peru


(bn new soles December 2007)

-

10

20

30

40

50

60

70

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009



Initial balance

Source: BBVA ERD

*February 2009 Data

27.6% (2008)

35.8% (2007)



FIAP Warsaw 2009 16



-

200

400

600

800

1.000

1.200

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009



Initial Balance


55.7%

55.7% (2008)

61.2% (2007)

Source: BBVA ERD

*March 2009 Data

Mexico



FIAP Warsaw 2009 17


The most important thing has been the accumulated real yield in Latin America registered 7.9% in 2008.

Reformed Pension Systems in LATAM*

1998 11,7%1999 14,7%2000 12,5%2001 11,8%2002 10,7%2003 10,6%2004 10,2%2005 10,1%2006 10,4%2007 10,2%2008 7,9%

*/ weight average by administrative assets of the systems profits in Colombia, Chile, Peru y Mexico

Source: BBVA ERD

**/ Figure out by accumulated net yield of commissions in each system.

Accumulated Real Yield**

FIAP Warsaw 2009 18


A multifund model linked to the affiliates’ life cycle has been an important element in strengthening the pension fund system

The majority of affiliates have investment options with intermediate or conservative exposure to equities

*People cannot be in more than one SB by law therefore the diagonal sum is 100%.

*Mexico: Affiliates by age - pension multifund scheme (Siefore)*-26 +27-36 +37-45 +46-55 over 55 years old

SieforeSB1-More Conservative 13,3%SB2-Conservative 37,4%SB3-Intermediate 26,1%SB4-Risk 14%SB5-Riskiest 9,20%Source: Consar

Chile: Affiliates by type of funduntil 20 +20 -25 +25 -30 +30 -35 +35 -40 +40 -45 +45 -50 +50 -55 over 55 years old

FA- Riskiest 8,4% 21,9% 18,9% 15,0% 12,3% 10,6% 8,0% 4,0% 0,8%FB- Risk 7,7% 18,3% 22,0% 23,2% 21,9% 2,5% 1,4% 1,5% 1,6%FC- Intermediate 0,1% 0,6% 1,2% 1,5% 22,0% 26,6% 23,9% 16,6% 7,4%FD- Conservative 0,0% 0,2% 0,6% 1,0% 1,2% 1,4% 1,4% 26,7% 67,5%FE- More Conservative 0,5% 2,4% 7,0% 11,5% 14,2% 15,7% 15,2% 13,2% 20,3%Source: Superintendencia de Pensiones

FIAP Warsaw 2009 19


0

5

10

15

20

25

< de 25 25a29 30a34 35a39 40a44 45a49 50a54 55a59 > de 59

Fondo 2

Fondo 3

Peru: Affiliates by age and type of fund* (%)

Source: AFP Horizonte

*Fund 1 is not included because 96% of affiliates are over 55 years old

Older affiliates, with less time to recover possible losses, prefer the most conservative fund (Fund 2), while younger ones

choose the higher risk fund (Fund 3)

A multifund model linked to the affiliates’ life cycle has been an important element in strengthening the pension fund system

FIAP Warsaw 2009 20


Some Problems in Latin American “multi-fondos” DC systemsSome Problems in Latin American “multi-fondos” DC systems

Members can only choose one fund, defaults assign members to single fund; combination of two may be optimal

Members can only choose one fund, defaults assign members to single fund; combination of two may be optimal

Each “multi-fondo” has a fixed equity-bond allocation and does regular rebalancing; details of strategic asset allocation left to AFPs, reviewed regularly

Each “multi-fondo” has a fixed equity-bond allocation and does regular rebalancing; details of strategic asset allocation left to AFPs, reviewed regularly

Some SuggestionsSome Suggestions

Pension funds measure performance against market benchmark, not average industry return

Pension funds measure performance against market benchmark, not average industry return

How you choose in the cumulative phase impacts management in the pay out phaseHow you choose in the cumulative phase impacts management in the pay out phase

Allow international diversificationAllow international diversification

Source: OECD

Regulator defines the default age-based investment glide path after a full calibration of model for a typical worker/s

Regulator defines the default age-based investment glide path after a full calibration of model for a typical worker/s

The default life-cycle model has step changes in asset allocation rather than gradual shiftsThe default life-cycle model has step changes in asset allocation rather than gradual shifts

Strategic asset allocations change with market conditions, no rebalancing age-based default asset allocations moving around

Strategic asset allocations change with market conditions, no rebalancing age-based default asset allocations moving around

FIAP Warsaw 2009 2121

Contents




1

2


4




Regulations


5



Conclusion

FIAP Warsaw 2009 22

Regulation and supervision schemes in Latin America have been extensive and precise

Pension fund answers to the current financial crisis4

Risk management supervisionRisk management supervision

Safeguarding the pensioners’ interests with adequate government policiesSafeguarding the pensioners’ interests with adequate government policies

Design of elements with adequate information to mitigate risksDesign of elements with adequate information to mitigate risks

Avoiding moral hazard: “fiduciary” responsibility and conflicts of interestsAvoiding moral hazard: “fiduciary” responsibility and conflicts of interests

Adequate measures for improving portfolio allocationAdequate measures for improving portfolio allocation

Multifund: restrictions by ageMultifund: restrictions by age

Portfolio diversification Portfolio diversification

Giving precise information to pensionersGiving precise information to pensioners

Internal and external control of funds valuationInternal and external control of funds valuation

Having minimum reservesHaving minimum reserves

FIAP Warsaw 2009 23

Mexico

Oct-08

Reduction of the long-term instruments supply

Re-Purchase instruments

Swaps of interest rate until $50 bn

Allow to temporary exceed the VAR levels authorized

Nov-08

Authorization to Siefore for contracting credits in order to liquidate with future flows

Flows coordination (collection & liquidación de traspasos)

Temporary suspension of the automatic traspaso of Siefore by changes of the affiliates age

Measures by financial authorities(SHCP, Bank of Mexico & Consar)

Measures by Congress

Dec-08

SAR law reform

More rights to Consar for authorizing commissions

Quarterly instead of half Consar reports to the Congress

Send at least 3 balance to worker instead of 2

Consar has faculties to establish measures that could protect worker resources in atypical circumstances in the financial markets

The Board of Governors of Consar can modify the investment regimen and reorganize the Siefore portfolios in extraordinary circumstances

Measures by Industry

Feb-09

Afore agreement

2009 giving follow up to SAR resources for investing in financial instruments and productive projects in Mexico

Considering infrastructure projects that could be compatible with the investment regimen

Continuing participating in housing financing, states and council projects

Pension funds answers over the current financial crisis4

The reaction, facing the current financial crisis, has been quick

FIAP Warsaw 2009 24

Peru-Creating a fourth fund with low risk. Investment of this new fund will be in fixed trade instruments (bonds, deposits and others).

-Creating the Infrastructure Fund. The Pension Fund Administrators (AFP) will invest in this new fund, improving the investors yield with long-term projects.

-Modification approach of the AFPs commissions charge scheme, changing from a fixed commission to a mixed new type. In the fixed part will correspond a percentage of affiliate remuneration while the variable part will determine in function of pension fund profits.

-Different approaches are addressed to protect workers affiliate to the pension private system and will be unemployed.

Chile -Flexibilization in the balance distribution process, affiliates who have their savings in two kinds of funds, will choose the new fund which received the new quotations.

-Affiliates who have their savings just in one fund can choose a second type of fund to receive new quotations, without balance redistribution


The reaction, facing the current financial crisis, has been quick

FIAP Warsaw 2009 25

Allocating their portfolios in low volatility assets and with a lesser degree in changes risks

Latin American pension funds search to protect their investment


Source: BBVA ERD

Fixed Income -Latam pension funds (Fixed income share % in the system portfolio)

0

10

20

30

40

50

60

70

80

90

100

Mexico Colombia Chile Peru

jul-08

dec-08

Source: BBVA ERD

Domestic Investment -Latam pension funds(Domestic investment share % in the system portfolio)

0

10

20

30

40

50

60

70

80

90

100

Mexico Colombia Chile Peru

jul-08

dec-08


Contents




1

2


4




Regulations


5



Conclusion

FIAP Warsaw 2009 27

None crises are the same and we do not know, how long is going to length the current one

Conclusion

Recession Length(months)

YieldAfter a year

Negative

Yield

Great Depression (1929-1932)

World War II (1937-1942)

Post War II (1946-1949)

Oil Crisis (1973-1974)

Debt Crisis (1980-1982)

Stock Exchange Crash (1987)

Internet Bubble (2000-2001)

34

61

37

21

21

4

31

-86%

-60%

-30%

-48%

-27%

-34%

-49%

124%

59%

42%

38%

58%

23%

34%

Current Crisis (2007- ?) 18.5 -46% ?

Average 13 Crisis

(exclusion the current crisis)22 -39% 46%

Source: ISI, Bloomberg, National Bureau of Economic Research, Haver Analytics

(1)

(1) Accumulated Fall of S&P 500 Index

5

FIAP Warsaw 2009 28

• Solidarity Pillar: Incentives in voluntary savings• Solidarity Pillar: Incentives in voluntary savings

New Proposals

Conclusion5

Latin American pension fund systems are well-placed to face and recover from the current crisis

Structural problems need to be resolvedStructural problems need to be resolved

• Coverage: Mandatory and/or opt-out schemes for self-employed and non-contract workers

• Coverage: Mandatory and/or opt-out schemes for self-employed and non-contract workers

• Disability and survivor benefits• Disability and survivor benefits

• Implicit debt reduction• Implicit debt reduction

• Equity diversification, taking into account considerations for mandatory pension funds

• Equity diversification, taking into account considerations for mandatory pension funds

• Competition, fees and financial knowledge• Competition, fees and financial knowledge

FIAP Warsaw 2009 29

Chile Peru Mexico

BBVA promotes debate, research and the improvement of pension systems

Colombia

Conclusion5


David Tuesta

Chief Economist of Global Trends Unit

Economic Research Department of BBVA

FIAP

Warsaw, Poland

28 May, 2009

Asset prices in the economic cycle: a historic perspective

David Tuesta Chief Economist of Global Trends Unit Economic Research Department of BBVA FIAP

Documents

Transcript of David Tuesta Chief Economist of Global Trends Unit Economic Research Department of BBVA FIAP