Afore XXI Banorte leads Mexico’s pension fund system

After its acquisition of Afore BBVA Bancomer in March last year, Afore XXI Banorte became Mexico’s largest pension fund manager


Mexico’s compulsory pension system started to change in the 1990s. Although the country still had a relatively young population at the time, the rapid growth of the ageing population was starting to strain the original pay-as-you-go system. That system was deemed unsustainable in the long run, and in 1997 Mexico decided to implement a new defined contribution system with individual accounts managed by private fund managers.

Since its creation in 1997, Mexico’s Compulsory Pension Fund System (known locally as ‘Afores’) has gone through various development phases and, as of December 2013, has $157bn of assets under management (AUM), representing 13 percent of Mexico’s GDP (see Fig.1), and is growing more than $12bn per annum. The system has been continuously transformed over the past 16 years in an attempt to adapt to the country’s changing environment and to the global financial landscape.

Source: Afore XXI Banorte

The scope of the original defined contribution system, for instance, has expanded beyond private company workers to encompass federal government employees. This has helped increase the number of accounts managed by the system to almost 51 million.

Likewise, investment regulation has had to adapt to the growth in AUM and to the development of the Mexican financial markets. In the early years of the system, virtually 100 percent of the funds were invested in domestic short- and medium-term government securities in one type of portfolio, regardless of the workers’ age.

Now, each of the Afores has four compulsory portfolios with a differentiated investment regime tied to the age of the worker. These portfolios have a large variety of domestic and foreign securities, including structured investments, and the proportion of Mexican government securities has fallen to around 50 percent.

The changing economic environment has created challenges for the Afore market participants. Fund managers have faced a highly competitive market for workers’ individual accounts, and have had to implement different strategies to achieve market share and efficiency.

The number and size of players has changed over the years, and it currently stands at 12 administrators. The recent market consolidation has been driven by falling fees and the search for economies of scale. Afore XXI Banorte has been the main participant in this process, and has consolidated the portfolios of five Afores in the last four years.

Market leader
Afore XXI Banorte is the main player in the Afore market. Since March 2013, with the acquisition of Afore BBVA Bancomer, Afore XXI Banorte became the largest pension fund manager in the country. As of the end of last year, Afore XXI Banorte managed more than 17 million individual accounts and AUM of $42bn, 26 percent of assets managed by the system. This achievement is the result of a carefully planned strategy by Afore XXI Banorte to become the best Afore in Mexico.

Afore XXI and Afore Banorte merged their operations in December of 2011, with the aim of creating a more efficient company. The resulting merger allowed the Afore to reduce the commissions charged to its customers and to improve its competitive position in the market. The combined entity has further benefited from the expertise of its two shareholders, the Mexican Social Security Institute (IMSS), and Grupo Financiero Banorte (GFNorte), the third-largest financial group in Mexico.

Afore XXI Banorte


Individual accounts managed


Assets under management

The Afore BBVA Bancomer acquisition, aside from creating the largest pension fund in Mexico, which is also managed entirely by Mexicans, delivered immediate and tangible benefits to the stakeholders. After completing the acquisition, Afore XXI Banorte further reduced its commissions to the lowest level among the private pension fund managers in the Afore system (currently 1.07 percent annually), benefitting more than 17 million account holders.

The new Afore XXI Banorte is the result of the combination of three of the most important Afore participants in the country. It has chosen the best practices of each of its constituents and has increased the synergies that started with the merger of Afore XXI and Afore Banorte. The Afore is already the largest, most efficient private participant with the lowest commission, but its aim is also to offer the highest levels of service and to become the premier investment manager.

Investment philosophy
Afore XXI Banorte has the best and most complete investment team in the Afore system. It leads the industry in the implementation of best market practices and internal compliance systems. It is also a leader in technological innovation, and has successfully implemented state-of-the-art technology to make the investment process more robust.

The Afore uses technology developed by Murex, a French technology platform, that allows real time processing and monitoring of all the portfolios, with real-time links to the risk management system (Riskwatch). This allows pre-trade simulation of every transaction, guaranteeing full portfolio compliance with each investment mandate.

On a trade-by-trade basis, compliance to a complete set of limits is verified before transactions are closed, ensuring that all mandatory limits are respected. In addition to this, a set of alarms is currently in place so if any risk gets closer to its limit, traders and the proper level of management are alerted.

Afore XXI Banorte has a strong corporate governance structure that follows international best practices. Financial risk management plays a key role in the decision making process of Afore XXI Banorte.

Afore XXI Banorte closely monitors risk at various levels, from the board of directors down to its investment committee, risk management committee, internal sub-committees and risk management unit. Financial risks are defined, identified, measured and managed, including market risk, credit risk, liquidity risk and operational risk.

An Investment and Risk Management Committee, including top managers as well as external advisors, is held on a monthly basis. This committee reviews the investment strategy, analyses key financial risk management figures, identifies the main risk drivers and takes decisions regarding the appropriate risk levels.

On a quarterly basis, a summary of the key risk drivers’ evolution is reviewed at the board of directors meetings. Additionally, given the size and importance of Afore XXI Banorte within the Afore industry, the regulator carries out a close supervision of the organisation.

Regular visits from the regulator, along with internal and external audits, complement the risk management framework in place.

All of Afore XXI Banorte’s directors, officers and employees are subject to a strict code of business conduct and ethics that establishes a set of guiding principles. These principles, together with strong ethical commitment, ensure the fulfilment of our fiduciary obligations.

New challenges
As the major market player, Afore XXI Banorte is inextricably linked to the development of the Mexican pension market. The growth of AUM and the low level of contributions are some of the most immediate challenges faced today. Regulators and market participants have to continuously adapt to the changing circumstances in order to allow the system to fulfil its pension commitments to the Mexican workers.

The investment regime already poses a challenge to the Afores. The Afores are major players in the Mexican equities and debt markets, but in many ways they have outgrown the local capital markets. The Afores are already the major institutional investors in the Mexican Stock Exchange and, together with foreign investors, are the major participants in the Mexican long-term debt market. The Afores investment regime has expanded to permit investment in foreign securities up to 20 percent of total assets. However, many participants are close to reaching this barrier.

The opening of new investment opportunities in the Mexican energy and infrastructure sectors will demand financing from many sources

Aside from foreign investment barriers, the Afores face impediments to increasing their participation in alternative investments such as real estate, infrastructure and private equity. Afores are currently allowed to invest up to 20 percent of their assets in market instruments tied to alternative investments. They have not reached this limit yet, partly due to the lack of flexibility of current investment structures.

The opening of new investment opportunities in the Mexican energy and infrastructure sectors will demand financing from many sources, and the Afores will require an investment regime flexible enough to allow them to participate in these projects.

The ultimate goal of the Mexican compulsory pension system is to provide retirement income to Mexican workers. Part of this will be achieved through the improved returns of pension funds. The other side of the equation requires large enough contributions so that workers have a large enough base to sustain them in their retirement years. This can be addressed through compulsory contributions and voluntary savings.

The Mexican government determines the level of compulsory contributions. However, the Afores have a responsibility to make the Mexican workers aware of the benefits of voluntary savings.

The current level of voluntary savings is very low; less than one percent of AUM. For many Mexicans, the Afores offer the best available investment alternative, and it is to the detriment of all participants that voluntary savings have not grown.

Afore XXI Banorte, through its varied investment alternatives and its nationwide sales coverage, is the leader in voluntary and private savings with a 90 percent market share. It will continue promoting the growth of voluntary savings, reflecting its commitment to the long-term growth and sustainability of the Mexican pension system.