Law 100 of 1993 and Law 1328 of 2009 establish that Colombian pension funds administrators (AFP, for its Spanish acronym) are compelled to guarantee, at least a minimal profit to individual savings and in cases where the minimal profitability is not guaranteed, the AFP should replenish the missing amounts with the yield stabilization reserve, which equals 1% of the funds or with their own economic resources.
Despite that this legislation hopes to preserve the real value of the pension funds, workers contributing to AFP Porvenir received this week news that the yields of their compulsory pension contributions were negative, producing distrust among account holders. Considering that all AFPs invest in similar financial assets and in similar amounts, it may be inferred that the losses reported during the first quarter are not only for Porvenir affiliates but to all affiliates to the individual savings regime.
Although the long-term cycles as those of the pension funds may have negative profits –which should not be unexpected– they also make people reflect on the robustness of the optimistic forecasts that the Colombian Association of Pension and Severance Pay Funds Administrators (ASOFONDOS, for its Spanish acronym) recently stated, concerning their proposal for pension reform in Colombia.
ASOFONDOS claims that to achieve a determined pension amount, affiliates must contribute 30% of this value because the remaining 70% will be obtained by financial yields. This supposes accrued yield expectancies over 200%, therefore it is speculative as there are no technical studies to support such claims.
Inclusively, for multilateral organisms such as the Organization for Economic Cooperation and Development (OECD), the perspective for pension funds are not that optimistic. According to a 2015 article of Universidad Nacional de Colombia (UNal) Professor and Analysts, Flor Esther Salazar, “Productivity will not maintain the necessary growth rhythm to support valuation of bonds and stocks […] pension funds and insurance companies will have hardships because their assets will appreciate less than their liabilities or provisions to tend to their affiliates. […] The risk comes from that the collections will be invested less in real assets and more on high-risk accounts and complex products with limited liquidity”.
Another important scenario which needs to be considered in this context is the precariousness of employment in Colombia and its consequential low density of affiliate collections. According to former director of the Banco de la República (The Central Bank of Colombia) and current Director of the National Association of Financial Institutions (ANIF, for its Spanish acronym) Sergio Clavijo, the PILA/PEA relationship [Integrated Social Security Contribution Form (PILA, for its Spanish acronym) – PEA (Economically active population (PEA, for its Spanish acronym) ] is 43 % and only 26% of the PEA contributes with densities greater than 70%, in other words, eight months a year. These results were presented in his article, “Elements for a Structural Pension Reform.”
This intermittent dynamic of workers making exceptional efforts to keep their savings within the pension system, combined with a climate of distrust due to negative yields, do not generate incentives for workers to make an effort to obtain a pension.
And even worse, given the working intermittence, if a worker finally gets a job and contributes to the fund during any first quarter but not the rest of the year, it will not have the opportunity to recover the lost yield, which would mean 32% less savings with respect to what he/she could have saved during that year.
Although the AFPs belittle the situation saying its only temporary and it will be compensated if there are good yields, it is still doubtful if these accrued long-term episodes can cause replacement rates to be inferior to those promised by the AFPs when they register new affiliates.
Alejandra Sánchez Vásquez, Coordinator of the Actuary and Finance Master´s program
Óscar Javier López Alfonso, Professor of the Actuary and Finance Master´s program
Carlos Murcia Linares, Economist
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