Latin America Eyes Pension Billions as Welfare Alternative
(Bloomberg) -- Colombia is the latest Latin American country considering a plan to let workers to tap private pension savings, a move intended to soften the slump in consumer spending but which risks worsening some of the world’s deepest stock market slumps.
A bill sent to congress this week would allow some Colombians to tap as much as 10% of their retirement savings. Chile passed a similar measure this month, and Peru passed one in April. The Brazilian government is also considering allowing workers to make partial withdrawals from pension funds that still don’t offer that option, according to a report from the country’s pension watchdog.
In Peru and Chile, the measures were approved despite government opposition, and garnered popular support as millions lose their jobs amid the economic crisis. Colombia’s government also opposes the idea.
Lawmakers across the region are looking at whether pension savings can help workers survive the worst economic slump in decades, as cash-strapped governments fail to provide an adequate safety net. However, the measures risk forcing fund managers to dump assets into markets where demand is weak and liquidity low.
“This is a cash-flow relief but it’s dangerous,” said Catalina Tobon, head of strategy at Skandia’s pension unit in Bogota. “Pensions must be sacred, and people are losing decades of compound interest.”
The proposals also do little to help the large fraction of the population that works in the informal sector.
At the end of 2019, Latin American members of the International Federation of Pension Fund Administrators held assets worth $637 billion. Funds in Chile and Mexico each managed more than $200 billion, while Colombia’s had $86 billion and Peru’s held held $52 billion.
Colombia’s stock market has fallen 38% this year in dollar terms, the world’s biggest drop, while Brazil and Mexico are also among the worst performers.
Credicorp Capital said in a note that it estimates that Peruvians withdrew about $5.7 billion of pension savings or roughly 13% of assets under management by private pension fund managers, since the measure passed. Fund managers accessed their most liquid holdings such as bank deposits, Credicorp said, and have so far avoided triggering a significant sell-off in Peruvian stocks.
In Mexico, President Andres Manuel Lopez Obrador last week presented a pension reform plan in which companies would have to contribute more toward employees’ retirement funds while lowering the weeks a person needs to work before retiring.
If pension funds are forced to dump assets amid large withdrawals, they’re likely to sell whatever is easiest to sell first, Daniel Guardiola, equity analyst at BTG Pactual said.
“These drawdowns will likely force pension fund managers to sell their most liquid assets: sovereign bonds and international securities,” Guardiola, said in reply to written questions.
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