Mexican Afores post record profits

Despite a marked 4Q18 slowdown, the combined net income at Mexican pension fund managers (Afores) came to 10.7bn pesos (US$560mn) last year, the largest annual profit on record, according to pension sector regulator (Consar).

The net income was however only 1.5% higher than in 2017 and represented the slowest annual earnings growth in the last four years.

According to Consar data, profits at Afore XXI Banorte, Afore Banamex and Afore Sura accounted for 60% of total sector earnings. At the end of January, these Afores managed approximately 28.1mn of the sector's 63.0mn accounts.

"In the case of Mexico, almost half of the Afore are controlled by financial groups that have pension and banking businesses," said Tapen Sinha, director of the international center for pension research at Mexican higher education institution ITAM, as cited by local daily El Financiero.

Fees in focus

"There is evidence that for financial groups, the pension business consistently has a greater return on equity (ROE) and greater return on assets (ROA) than the banking business corresponding to a period greater than 15 years. The supposed competition has not managed to reduce the high profits," said Sinha, adding that management fees have been persistently high.

Income from fees at Afores also hit a historic high last year of 32.6bn pesos, 9.3% more than in 2017.

The strong income generation came despite a steady decline in the average fee charged by Afores, falling to 1.1% last year from 1.92% in 2008.

Under the current scheme, the monthly fee is charged on the total balance of assets under management and not on the amount that members contribute.

"It is urgent that we charge less fees, because with the current level, it can reduce by up to 22% the total savings over a period of 40 years," El Financiero reported Sinha as saying.

Mexican legislators are presently reviewing an initiative that would revise a number of fee-related issues, including broader oversight and adding a performance-based fee that under certain circumstances would reward Afores for exceptionally high yields.