Reforms in the capital market and in the labour sector will make it possible to maximise the benefits obtained by private financial institutions in the interest of workers
When it comes to pensions, Prima AFP is one company that certainly has both its country’s and customers’ interests at heart.
Prima AFP goes that extra mile to offer its affiliates an individual service, ensuring they are kept properly informed and advised on all subjects regarding their pension fund during their active years and through retirement.
World Finance spoke to a representative for Prima AFP to find out what drives the company to be so affiliate-focused and committed to Peru, the thoroughness of its investment process and success, their concern for offering their affiliates a properly informed service, the effect the private pension system has had on the country, and the truth behind the increase in the amount on money its managers can invest abroad.
Private vs. State
Peru’s pension system is split between the government-owned system and the private system. The government-owned system (ONP) is a defined benefit system, but there is also the option of the private pension managers, or Administradora de Fondo de Pensiones (AFPs), that work under a defined contribution system.
AFPs are private financial institutions aimed exclusively at managing pension funds under the individual account modality. This allows an affiliate to receive a retirement pension based on his or her contributions and the returns obtained by the investments made by the AFP.
Peru’s whole private pension system was established in the 1990s during a time of financial crisis and the virtual collapse of the state-run pension system.
Prima AFP is a private pension fund company based in Peru. It is a subsidiary of Credicorp (NYSE BAP), the first Peruvian financial group to be listed on the New York Stock Exchange.
An alternative system
Credicorp identified both a gap in the market and an opportunity to complement its lines of business, and decided to create its own pension fund management firm to consolidate its position as the leading financial group in Peru. As a result of Prima AFP launching into the market, the sector became more dynamic and other competing AFPs decided to lower their service fees.
Prima AFP officially entered the market on 8 August 2005, joining the private pension system as the fifth AFP in a market that had been stable for more than 10 years.
According to Prima’s spokesperson and CEO Mr Ruben Loaiza, the company “was established as an alternative for affiliates, with a value proposition based on strong backing from Credicorp itself, experience on investment management, permanent information and assistance, all at a modest service fee, which up to now still remains the lowest in the market.”
Government-owned pension crisis
The current model of private pension system was established in 1991, when the Peruvian Treasury was facing serious financial difficulties. The government-owned pension system had insufficient funds to meet its pension obligations. An analysis by the Peruvian Institute of Economics revealed that the required fund size to support pension liabilities would have been close to $10bn, out of which only three percent was funded at that time. Eventually the government system fell into a crisis, adversely affecting pensioners’ quality of life.
As a result, a defined contribution system started to take form, with the aim of obtaining good pensions for Peruvian workers. A law was enacted in December 1992 that created the defined contribution system and set forth that AFPs could start operations in July 1993, but coexisting with the government-owned system.
Pension’s reform effect
This system restructuring has been crucial to the growth and development of Peru as a whole, with the reform generating an increase and overall improvement in savings and how they are composed.
Mr Ruben Loaiza explains: “In its 17 years of existence, the private pension system has invested approximately $10bn in the local non financial private sectors: 46 percent in mining, 14 percent in energy, 13 percent in construction, nine percent in foods and beverages and six percent in telecommunications. It has also made a significant contribution to improving the country’s infrastructure, having invested $3.4bn, of which 61 percent has been in the energy sector and 20 percent in transport infrastructure.
“However, the AFPs do not just benefit Peru through financial contributions alone; there are several other ways in which they help the country. A private pension system also motivates people to work in the formal sector and remain in employment for a longer period of time.
“The funds managed by the AFPs also contribute to the development of the capital market in various aspects, including better quality of regulation, improved corporate governance and transparency, higher specialisation and the development of new financial instruments. It also contributes indirectly to improve the country’s credit rating and to increase the size of the capital market.”
The importance of the affiliate
The company’s main objectives are strongly affiliate focused, with Prima aiming to obtain excellent returns for its clients on a risk-adjusted basis, so that its affiliates receive the best retirement pension possible. Prima also holds customer service in high regard, promising to provide customers with top-quality service both during their active years and their retirement.
“Through our communication plan, our affiliates are kept informed about the contributions to their funds, the performance of the funds managed by us, the different types of pension which they can choose from when they retire, the economic and financial situation and Prima’s investment strategy, as well as any news concerning the AFPs,” says Prima’s spokesperson. “We also organise investment conference calls, allowing our affiliates to receive first-hand information from our Investment Management executives. Moreover, there is a service available to all affiliates through which they can receive information about the contributions to their funds and the balance of their personal accounts in the form of text messages on their mobile phones. All these services are totally free of charge.
“In regards to the advisory service, our clients have several service channels to direct their questions or requirements, either in person, via e-mail or by phone, according to their needs and availability of time.”
Growth during the ‘worst financial crisis in decades’
Prima makes all this possible through its successful investment strategy and good risk management. The company essentially seeks to obtain excess returns – relative to its benchmark – through selection of individual securities, predominantly in the Americas.
For Prima, the Americas in particular offer the right balance of distance and familiarity of language, culture, regulation and reporting standards, to provide a sense of comfort when it comes to making an important investment decision.
An experienced research team provides in-depth country, industry and company analyses, resulting in high conviction investments, while the investment team works favouring secular over cyclical investment theses to reduce the reliance on global growth for investment success.
These investment methods resulted in some of Prima’s portfolio companies to grow at double-digit rates through 2008 and 2009, in the context of the worst financial crisis in decades.
The real challenge
AFPs as a whole must invest roughly $2bn each year of new client contributions alone. This primarily goes to fund opportunities in the local markets, particularly in infrastructure, but generally these opportunities do not suffice to meet the fund’s growth. Therefore, Prima’s real challenge is finding new opportunities beyond Peru’s borders and working out the registration of each individual security with their regulator. The Superintendencia de Banca y Seguros (SBS, the regulatory body for AFPs, banks and insurance companies in Peru) first needs to ensure eligibility criteria is met and then it needs to approve it as an eligible investment for all pension funds.
Prima AFP has previously led the way when it comes to new registrations, being responsible for more than 89 percent of new foreign stocks registered with the SBS in 2010.
“We find investment candidates in multiple ways,” Prima’s representative explains. “Each investment professional, from research analyst to portfolio manager, has access to global sell-side research, travels to investment conferences ranging from macroeconomic to industry-specific forums, participates on analysts calls, visits companies – domestic and international – and spends time researching in-house, based on all imaginable sources of information available. Tentative investment opportunities then emerge, which are elevated to the SBS for registration.
“Our research analysts are specialised by industry and are encouraged to find the best investment alternatives within their space, regardless of location, currency or stock exchange. We also search for investment themes, for example the growing middle class in emerging markets, and look for the ‘best way to play the theme’, which could turn out to be a company, a mutual fund, or a combination of these two.
So how does Prima assess available investments to ensure success for both the company and for their affiliates?
According to Prima’s spokesperson, every member of the team has a yearly target for new investment ideas, which is thoroughly analysed and discussed in an internal investment committee with the most senior members of the investment team. “New ideas are brought to the table frequently, particularly relating to foreign investments, following the gradual increase of the limit to invest abroad: now at 30 percent but with potential to be increased gradually to 50 percent of assets under management.”
Peru’s Central Bank has been gradually increasing the limit on the amount that private pension fund managers can invest abroad throughout the year, from 22 per cent to 30 percent of assets.
Prima’s representative believes that clients should view this increase as a very positive one for several reasons.
“First, the ability to diversify the investment portfolios has improved substantially. On one hand, the local market is highly concentrated in mining, which may be seen as attractive through the current commodity cycle, but poses a high concentration risk whereas foreign markets offer exposure to various themes, sectors and industries that may provide a greater risk/reward balance than some local investments.
“We also gain portfolio flexibility through foreign markets, as we would generally invest in more liquid securities abroad.
“Last but not least, we perceive a shortage of available investment opportunities in the local market to meet our growth in assets through new client contributions.”
Prima is adamant that it has been, and will continue to be, supportive of initiatives aiming to increase the limit for pension funds to invest abroad, believing that the benefits for its clients will outweigh the potential negatives.
Ideally, says Prima’s spokesperson, each investment should be analysed on its own merit, and location should take a secondary role in the investment process. Furthermore, increasing the limit to invest abroad will not jeopardise Prima’s ability to fund large-scale infrastructure or other projects in Peru, either through equity or bonds.
To the future
With the country’s expected growth and the increased generation of formal jobs, Prima expects the number of affiliates to the AFP system to continue to grow in the future.
“In our opinion, the integration of new workers will be more dynamic in the provinces in comparison with the year 2010,” says Prima’s representative.
The company also believes that some of the government reforms in the capital market and the labour sector will make it possible to maximise the benefits obtained by the AFPs in the interest of the workers. Among such reforms, Prima feels it is important to develop a mechanism to ensure a retirement pension for self-employed workers, facilitating their incorporation into a pension system. The self-employed have often been overlooked when it comes to the Peruvian pension system, mainly because participation is not mandatory for them. In contrast government and private employees who enter the labour market are required to choose between the two systems.
“The system expects to reach approximately five million affiliates and more than 100,000 pensioners by 2011,” says Prima’s spokesperson. “We also expect that the overall assets under management of the AFP system will exceed $35,000m, allowing the AFPs to further contribute to the funding of infrastructure projects, which are so necessary to improve the country’s competitiveness and job generation, in addition to continue improving the pensions.”
A stronger market position
As far as Prima AFP is concerned, Mr Loaiza believes that it will further strengthen its leading position in the market, growing in the number of new affiliates, and customer care will continue to be imperative.
“We will keep our affiliates well informed and will provide them with advice throughout the retirement process. We will expand our coverage in the provinces by opening new branches to be closer to our affiliates and will continue to support the incorporation of self-employed workers.
“We also plan to continue with the Quality Management model (ISO 9001:2008) and will further work to improve the efficiency ratios of our processes for the benefit of our affiliates.
“Regarding the fund investment management, we strive to consolidate our position of market leaders by delivering excellent returns in the AFP system. To achieve this, we will maintain our objective of identifying investment opportunities, domestically and abroad, that provide the best possible balance of risk and reward based on a rigorous fundamental analysis and always with a long-term view in mind.”
All figures shown are up to December 31 2010. Calculations made by Prima. Source: Superintendencia de Banca y Seguros del Peru. For more information www.sbs.gob.pe