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Argentina's President Cristina Fernández de Kirchner on Tuesday (Oct 21) announced the nationalization of the private pension fund manager (AFJP) business.
The measure would force the country's 10 AFJPs to transfer the 94.4bn pesos (US$29.3bn) in assets they held as of end-September to social security agency ANSES.
Speaking before an audience at the ANSES headquarters on Tuesday afternoon, Fernández said the measure was a "strategic decision" taken to preserve Argentine retirees' savings. The new system will be called SIPA (Sistema Integrado Previsional Argentino).
On Monday, local daily Clarín broke the news, citing a document from ANSES that said recent losses in AFJP funds prompted by market volatility are evidence the system is "conceptually inadequate".
"We come to put an end the failed experiment of the capitalization regime," said ANSES head Amado Boudou before the President's speech.
The AFJPs saw assets under management shrink by 3.48bn pesos in September compared to the previous month while also recording a negative average return on assets of 2.25% in nominal terms in the year-ended September 30.
Markets reacted to the nationalization news, sending local stocks down 11% on Tuesday to a four-year low, government bond yields around 24% and the country's EMBI+ risk index above the 1,600-point mark.
A Buenos Aires court on Tuesday prevented AFJPs to operate in the market and liquidate their positions, thus allowing the stock market to partly revert losses from a 14% low during the day.
Taking over the AFJP accounts would allow the government to access revenue sources that are currently unavailable in the market to tap its funding needs for 2009, Juan José Vásquez, head of research at Bull Market Brokers, told BNamericas.
Contributions paid to AFJPs total some 15bn pesos annually.
According to recent Credit Suisse (NYSE: CS) report, Argentina's financing needs will grow to US$11.3bn next year.
Nationalizing the accounts would require congressional approval. While opposition leaders called the measure "robbery," according to local press, Fernández allies control both chambers of congress.
The UAFJP association was awaiting an official announcement from Fernández before making any comment, a UAFJP spokesperson told BNamericas.
THE END OF AN ERA
Argentina implemented a major reform of its pension system in 1994 that resulted in a mixed two-pillar public and private structure. Coupled with the social security system, a fully funded defined-contribution individual capitalization pillar is managed by the AFJPs.
The ANSES document cited by Clarín entitled The Unfulfilled Promises of the Capitalization Regime questions the system's weak coverage, high commissions and low pensions.
After enjoying a warm welcome when Peronist president Carlos Menem implemented the system, the AFJP system has been under constant fire and subject to the whim of recent governments.
Following the country's 2001-02 crisis and US$100bn debt default, economy minister Domingo Cavallo forced AFJPs to channel a large portion of funds under their management to buy Argentine government debt.
In 2005, Argentina completed a massive debt restructuring, with about three quarters of creditors accepting the new bonds on offer. The Argentine AFJPs and other local financial institutions were among the first to sign up for the bond swap.
Today, about 55.5% of the AFJPs' investments are in government bonds.
The AFJP system is highly regulated and last year suffered another intervention. The government allowed AFJP affiliates to return to the state-run system, capped AFJP commissions and forced them to repatriate mutual fund assets held in Brazil by limiting their investments in countries affiliated to the Mercosur trade bloc.
The fact AFJPs will no longer be important players in the local stock market will mean Argentina will likely take more time to recover from recent stock losses should global markets rebound in the midterm, Vásquez said.
AFJP investments in local stocks fell to 10.9% of the total at end-September from 13.4% a year ago, with investments abroad also dropping to 6.5% of the total from 9.22%.
The AFJPs have some 9.5mn affiliates, of which only 3.6mn actually contribute to the system.