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Evolution AFORE

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Evolution AFORE


  • The publicly mandated and privately administered pension system in Mexico was formally introduced in July 1997. The government did not want to decentralize the system of "head counting". It introduced a new method of counting people under the new regime mindful of the multiple account problems under the old SAR. This method plus mergers and acquisitions are described


  • A centralized national database system for pension information has been set up. This database is called the National Database for the Retirement System (Base de datos Nacional del SAR, BDNSAR). This has been set up with the specific purpose of having strict identification of persons matched with their money.

Problems with SAR92

  • In the 1992 introduction of SAR accounts, the accounting process did not work at all. As a result, 10 million workers ended up with 65 million accounts

Banks as recipients

  • IMSS entered an agreement with the thirteen largest banks in Mexico to act as "collecting entities". These collecting agencies use their bank branches to collect information and money from the employers. If the information received does not match some pre-established (and transparent) criteria, the payment is refused and the employer is notified. The quality of information therefore does not degrade over time.


  • This method allows tracking of migration of persons across different funds as well as keeps track of movement across employers. It was recognized that the existing methods of unique identification through the numbers assigned by the IMSS or the Hacienda (called RFC) did not work. Thus, the government introduced a new (supposedly unique) identification number called CURP (Clave Única del Registro de Población).


  • To manage such a large database, a new database system was introduced. This entity called PROCESAR managed under BDNSAR. It is under strict government control but operated privately. It is supposed to keep track of all the individual accounts by establishing a one to one correspondence between the affiliates and the accounts.


  • For the integrity of the system, it is imperative that there is a regular flow of information and money in the system. We have described above the basics of checks and balances in the system. Here, we describe the timing of this process

Flow of information

Day t


Bank (collecting agency)

Day t+1

Database (PROCESAR)

Pension Fund

Day t+6

Day t+9

Fund Manager

Central Bank

Day t+8

IMSS and


Day t+7

Database (PROCESAR)

Figure 3.1

Flow of funds


Day t

Bank (collecting agency)

Day t+1

Central Bank

Day t+8

Fund Manager

Day t+8

Pension Fund

Flow of funds

  • Suppose the employer successfully transfers the money to the collecting agency (bank) on day t. There are thirteen banks authorized to carry out these transactions. On day t+1, the banks transfer the money to Banco de Mexico (Central Bank). Exactly a week later (day t+8), the central bank transfers the funds to the fund managers. Fund managers credit the fund to the account holders of the funds on the same day (day t+8). This flow does not take into account the yield from the balance in the fund itself that has gathered over time. It only refers to the new flow of funds.

Flow of information

  • The flow of information follows a similar path to the flow of funds. If the collecting agency (bank) gets the information on day t, it passes it on to PROCESAR on the following day (day t+1). PROCESAR gives the information to the fund managers on day t+6. Note that the flow of information takes place before the movement of money (which takes place on day t+8).

Flow of information

  • Information is also sent to IMSS and INFONAVIT. Information is double-checked and the following day it is sent back to PROCESAR (day t+7). The information is sent to the Central Bank on day t+8. After the Central Bank verifies the information, it sends the money first to the pension funds on the same day (day t+8). Information is relayed to the pension funds on the next day (day t+9).

Duplication problem of AFORES

  • Despite CURP, RFC, NSS there are problems of duplicate accounts

  • In 2000, it was reportedly 500,000

  • In 2005, it was over 1,000,000

  • In 2009, it is over 1,500,000

  • Industry: Agriculture, Construction

Number of funds

  • In 1996, 44 funds registered, 2009 18 funds


  • The number of people in the new system rose from under a quarter of a million in February 1997 to over 15.5 million by the end of 1999. The growth has not been linear. In the first ten months, the number of affiliates grew at a tremendous pace until it hit about 10 million.

1997 1999 2001

The Good News

When did it happen?

Big jump in numbers in June 2001: forced assignment of affiliates

Method of allocation of affiliates

  • CONSAR allocates affiliates by ranking all the funds according to their charges equivalent over account balance for one year.

  • It then takes the quartile of AFOREs with the lowest charges

  • Thus, the fund with the lowest charge gets allocated 100 points. If the AFORE with the second lowest fees charge 80% of the lowest, then that AFORE gets 80 points and so on

  • AFOREs are then allocated the new accounts based on their points

The Bad News

Bigger funds have more affiliates contributing regularly

Appearance, Disappearance and Concentration

Share of top 4 has barely fallen

“Regular” contributors, 2004, 13m

60% of regular contributors earn < 3 minimum salary

Market share: Head count

  • Limit set at 17% but on the number of affiliates

  • Not on the investment

  • What is the incentive for AFOREs?

Special Fund

  • One fund was "special". The fund XXI (Siglo Veintiuno or Century Twenty One) was the privatized arm of the IMSS, the state-run pay as you go system. When this fund was being set up, many market analysts expected that it would be one of the largest funds. Mexican workers in the formal sector would instantly recognize IMSS brand name.


  • The name IMSS was recognized by people, but it was associated with inefficiency. Therefore, it repelled more people than it managed to attract. It has less than 3.5% of the market share. This failure of the Mexican privatized arm of IMSS stands in sharp contrast with a similar effort in Uruguay.


  • In Uruguay, the privatized state fund, República, managed to capture the largest market share there. By the end of 1999, República captured 37% of affiliates and 55% of total market funds. This fund was so successful for one simple reason. It had the backing of the government of Uruguay to insure the safety of the fund. In Mexico, the government did not issue any explicit guarantee for any fund.

How far?

  • Suppose we assume that the growth rate of the AFOREs stay the same as the growth rate of the real GDP. If we assume that the real rate of return averages around 6%, then, in 2020, we could see the funds in AFOREs growing to around 40-50% of GDP. In Chile, the first twenty years of operation of the privatized mandated pension system generated funds worth 42% of GDP

Mexico vs. Chile

  • In the first twenty years, the withdrawal from the system will be low. As the system matures, we will see a large outflow from the system as workers retire with substantial time in the privatized pension system.

  • Mexico 6.5%, Chile 10% contribution

Investment regimes

  • Right from the beginning, severe restrictions were imposed on the mandatory privatized pension funds in Mexico. The rationale was simple: The government did not want to take any risks that could jeopardize the faith in the system. Having credibility was important for the system. During the crisis of 1994-95, banks in Mexico were hit extremely hard.

Investment regimes

  • The whole banking system had non-performing loans (basically it meant there was little hope of getting the principal back let alone interest due on these loans) to the order of 25-30% of total loan portfolios. The Federal Government in Mexico ended up assuming that loan. This meant that taxpayers in the end funded bad loans of the banks.

Where is the money?

  • Largely in government bonds

  • Smaller amount: private bond

  • Problem of crowding out

  • Notas estructuradas

  • Foreign currency

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