Argentina's senate on Thursday (Nov 20) approved President Cristina Fernández de Kirchner's plan to nationalize the US$24bn in assets under management currently handled by the country's 10 private pension fund managers (AFJPs).
The AFJP funds plus its annual contributions of up to US$5bn and some 9mn affiliate accounts will be transferred to state-run social security agency ANSES.
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 pay-as-you-go system, a fully funded defined-contribution individual capitalization pillar is managed by AFJPs.
"This is an historic change," said senator Miguel Pichetto, the head of the ruling Peronist party, in the session's closing speech following a 12-hour debate.
"It will bring stability to financial markets and the investments that pension funds have in local companies," he said.
Fernández announced her plan to take over the 10 AFJPs on October 21, creating a new system called SIPA (Sistema Integrado Previsional Argentino).
By the time of the announcement, the value of AFJP investments had fallen 40% year-to-date on financial market turmoil. Fernández said the nationalization was a "strategic decision" taken to preserve Argentine retirees' savings from the global financial crisis.
"It is the logic of populism to go after the productive sectors of the economy either through outright nationalization or punitive taxation as state spending skyrockets and revenues don't keep up," Ian Vásquez, director of the Cato Institute's Center for Global Liberty and Prosperity, told BNamericas.
The government has denied the funds will be used to pay the country's pressing financial obligations but the nationalization will allow the government to access revenue sources currently unavailable to Argentina to tap next year's funding needs.
Following the senate's approval announcement, Argentine stocks and bonds tumbled on Friday as investors became increasingly concerned government finances are weakening and another debt default may be on the way.
The South American country has not had access to international capital markets since its US$95bn debt default in 2001.
But even with added revenue from the nationalization of the pension funds, Argentina's risk of default "remains substantial," Goldman Sachs (NYSE: GS) economist Pablo Morra wrote in a report.
The president's original proposal was modified by the chamber of deputies - which approved the bill two weeks ago - to restrict how the AFJP funds may be used, demanding ANSES invest the assets "profitably and safely" and the setting-up of a 13-member oversight board.
It also limits the amount that can be loaned to the government through bond purchases, but the presidency's broad powers and the fact she controls congress will enable her to get round those restrictions and change the budget by decree.
"Placing retirement funds in the hands of a government with a proven record of fiscal recklessness does not increase confidence. Instead, the move will negatively affect capital markets in Argentina, reduce the willingness of lenders to provide credit to the country and impose a huge future pension burden on the government of Argentina," the Cato Institute's Vásquez said.
Argentina's new pension system is expected to begin operating on January 1, 2009.
Big foreign players in the Argentine pension market included Spanish bank BBVA (NYSE: BBV), US insurer MetLife (NYSE: MET), Dutch financial services group ING (NYSE: ING) and UK bank HSBC (NYSE: HBC).
The private AFJPs will receive some compensation for nationalization and will be able to continue operating in the voluntary retirement savings business, which only amounts to 1% of the funds the AFJPs manage today.
The government also operated in the AFJP system through state-owned banks.