Peru’s newly elected government, under Ollanta Humala, has taken steps to improve its pension model. Within this restructuring, Prima AFP is at the forefront of industry developments. Peru’s leading private sector pension fund provider welcomes its government’s proposals because it will benefit both the country and Prima’s affiliates. Prima strongly believes that the pension reform will lead to increased affiliate coverage since too many people in the country are not yet affiliated to any pension system. This in response will encourage efficiency as a way to lower costs, thus favouring affiliates. Prima follows changes in regulation  to make certain each of its affiliates receives the same personalised service they deserve.

Peru’s evolving private pensions
Peru is one of the world’s fastest growing economies. With around $30bn in assets, pension funds are the nations’ most significant source of investment capital. The pension revamp is anticipated to provide a reliable source of retirement income for workers and underprivileged Peruvians. Once individuals reach the retirement age of 65 and stop working, they can choose either a programmed retirement or purchase a lifetime annuity through their insurance companies. Any Peruvians in formal employment must select between the private and the government-owned pension system (ONP). Depending on the scheme chosen, they have to pay approximately 13 percent of their monthly salary without any additional employer contributions. In the Private Pension System 10 percent goes to the affiliates fund, the difference consisting of commissions and insurance premiums; in the government-owned system the distribution of how much goes to the affiliates fund and how much is commissions unknown.

Fund managers like Prima, however, say that the system needs improving. Prima believes that Peru’s government has to toil hard to bring in the large numbers of those workers who labour within the country’s informal economy. Prima’s schemes are for both self-employed and company employees. It currently holds a market share of 31.28 percent of assets under management and manages around $9.5bn for an estimated 1.19 million affiliates, with a monthly inflow of over $50m.

Prima is now embracing the government’s new proposal of reform and holds high expectations of how this will affect the pension industry. It applauds Peru’s finance minister, who recently set up a working group to study and design a plan to widen coverage and increase efficiencies in the nation’s private pension fund system. The new team is composed of economists from the Ministry of Finance, Congress, the Central Bank of Peru and the Superintendent of Banking, Insurance and Pension Funds.

There are, however, other changes Prima salutes as groundbreaking. Peru’s central bank increased the limit on pension funds’ overseas investments to 30 percent throughout 2010, while in 2011, a limit of 50 percent has been set by Congress but it has yet to be “unleashed” by the central bank. According to Prima, this is a highly positive industry development because it has provided scope to diversify investment portfolios. As a result, Peru gains portfolio flexibility via foreign markets- as it is now allowed to invest in an increased number of liquid securities in foreign countries. It is Prima’s perception that thus far Peru experienced a scarcity of accessible investment prospects within the local capital market to help meet its growth in assets through contributions from new clients. Without greater investment alternatives domestically, Prima would even lift these improved foreign investment percentages if it had its own way. Prima appreciates the flexibility and liquidity of the foreign markets. As of the end of September, 28.1 percent of Prima’s total assets under management were in foreign securities – 14.2 percent for Fund 1, 27.1 percent for Fund 2, and 35.5 percent for Fund 3.

Prima will continue to encourage initiatives that focus on increasing the limit for pension funds to invest abroad. It believes that the higher returns for its affiliates will prevail over any potential negatives. As global investors, location should play second fiddle in the investment process; instead investments should be considered individually for their own value, according to the company. Increasing investment abroad will not stop Prima from investing in large-scale projects domestically. It has made it clear that it will continue to support its people and its country.

Prima’s involvement within Peru’s pension system
Set up six years ago by financial services behemoth Credicorp, which was also the first New York listed Peruvian company (NYSE BAP),- Prima has gone from strength to strength thanks to its value proposition. Banco de Crédito, the nation’s largest bank, and Pacífico Seguros are also part of the group. Credicorp quickly recognised a gap in the market and decided to start its own pension fund management firm. This resulted in the industry becoming more active and forced competitors to lower their service fees, hence benefitting future affiliates.

But how does it stand out? Prima scheme contributions are invested into one of three different funds, all with differing risk profiles. Compulsory payments have to go into one fund only but affiliates can decide if they want to pay in an additional, voluntary amount to any of the three funds. Its Fund type 1 is designed for those close to the retirement age.

Within this fund, 90 percent is held in fixed income investments with maturities averaging no more than five years. Prima’s other two funds are aimed at people who are at least 10 to 15 years from retirement. Fund 2 invests 45 percent in large cap equities, real estate and private equity with the rest invested in bonds. Meanwhile, the proportion in equities and alternatives is 80 percent in Fund 3 – the maximum allowed by regulations. By law, clients must be automatically switched into Fund 1 when they reach their 60th birthday, but they can stay in, or move to, Fund 2 on request. This mechanism offers flexibility, good returns, is straightforward to comprehend and is appreciated by affiliates.

Prima leading the way at the head of the industry
Over the last 12 months Prima has yet again consolidated its leading position within the industry by keeping low costs and staying on top of the latest government initiatives. Prima also implemented methods to reinforce a broader knowledge of the private system among the general public.

It is this detail and the close relationship with affiliates that ensures it occupies the top spot in the industry. Although the second largest pension fund manager is one point behind it, with a market share of 30.22 percent, Prima has a five percentage point advantage in the monthly contributions of its affiliates as of the end of November 2011. It is therefore well positioned to continue growing organically at a healthy rate, as well as to continue consolidating its leadership in the industry.

Similarly, regarding management of clients’ voluntary contributions, Prima is in the lead with a 45.75 percent market share as of the end of November 2011. This is a true indicator of the trust that its clients place in it regarding the management of their surpluses.

Regarding its value proposition, Prima AFP has had the lowest management commission in the industry since its inception. And in terms of service provided, the results speak for themselves. Prima’s flagship fund (Type 2), which maintains 66 percent of its assets under management and accounts for 70 percent of assets in the industry, ranks at the top in nearly every measurement. Short-term results have been volatile, but over a five-year period, it has a solid track record on its three types of funds under management.

It has achieved these results with a long-term goal in mind. Prima’s top investment results have been matched only by its constant improvement in customer service. It moreover places great emphasis on transparency of information and ongoing communication with its clientele, which it feels are essential in maintaining their trust.

In line with this, Prima has continued to offer a conference call service, which enables its affiliates to call and listen to its investment manager and senior analysts who discuss macroeconomic issues, investment strategy, results and a question and answer session.
Prima recognises that people are still not fully aware of what the Private Pension system actually is. It has therefore launched a new web platform, AFPconversa (www.afpconversa.com.pe), which allows both affiliates and non-affiliates to be informed of the performance and benefits provided by the system. AFPconversa is also aimed at providing answers to inquiries relating to issues such as the AFP industry and retirement pensions. Prima with this platform aims also at building a stronger relationship with its affiliates and in general with all Peruvians interested in understanding the industry.

Prima looking to the future
Prima strives to continually put its affiliates’ interest first and invest their money as if it were its own. It is this promise of excellence that has ensured Prima received the highest accolade from World Finance as “Pension Fund of the year, Peru, 2012.”

According to Prima’s spokesperson and CEO Mr. Ruben Loaiza, Prima AFP is committed to delivering the best possible returns over time to its affiliates. The group does this through a thorough, diligent and disciplined investment process coupled with identifying, attracting and retaining talented investment professionals. What sets it truly apart, however, is that it possesses the humbleness to admit its mistakes, yet also the courage to defend high conviction investment ideas.

With the help of the new government reforms and the expected increase in investment alternatives, Prima hopes to achieve even better reimbursements for its affiliates.
Mr Loaiza says: “We continue working on all fronts in order to provide the best returns on investments and to offer our affiliates the best value proposition. We are proud of our achievements and, as can be noted by the above mentioned efforts, we are not resting on our laurels.”