The last five years have been ones of intense transformation for the largest pension fund in Mexico. Establishing a sound and replicable investment process has been one of the main challenges for the team. Changing the team’s culture towards long-term investing, based on optimising diversification, has been the name of the game, and even though there are additional challenges in the future, positive results arise both from a quantitative and qualitative perspective.

As a fusion between Banorte Bank and the Mexican Social Security Institute (IMSS), Afore XXI-Banorte is Mexico’s largest pension provider and is rightly held to extremely high standards of responsible investing. This partnership resulted in strong governance that provides both robustness and business continuity.

This partnership provides a unique mix of social responsibility, focus on profitability and awareness of environmental, social and governance (ESG) issues, which are increasingly important both to corporations and individuals investing for their pension. The knowledge sharing has not only resulted in high profitability levels for the company, but also in levering high standards that have resulted in having the most extensive regulatory licences in the system, which brings to the table better options for building portfolios in a more diversified way and the flexibility to diligently manage risk and active exposure in the markets.

The social approach towards investing is embedded into the process and the culture within Afore XXI-Banorte. It is no longer enough to simply pursue high investment returns, and the firm is keenly aware of its corporate and social responsibility, so much so that it is the only pension fund in Mexico that complies as signatory to the UN Principles for Responsible Investment. This reflects the engagement that the firm has in creating investment decisions that help model a better society for their affiliates. In this fiduciary role, ESG issues are assumed to affect the performance of investment portfolios, while also recognising that applying these principles may better align investors with the broader objectives of society.

 

Creating awareness
Pioneering ESG requirements in Mexico’s local market wasn’t an easy task. The first years in creating awareness within the investment community created a necessity of changing how this was usually done and rethinking the local dynamics. The trend was clear, but the market engagement wasn’t that evident.

But the pandemic forced everyone to re-engage and accelerate the changes that were needed, and the results can be seen. On the last annual review, Afore XXI-Banorte sent an ESG questionnaire to more than 300 companies in its investment portfolio regarding covering a broad spectrum of concerns such as carbon emissions, gender equity policies, contribution to Mexican society (in terms of employment generation and social commitments), ethical practices, and independence of the board, among others. The response of the investment community was surprisingly positive, which reflects the speed at which the approach is changing.

Several risks arise from these fast-changing trends, the most relevant being ‘greenwashing.’ That is why the team’s awareness on identifying the use of capital resources and periodically monitoring progress is key to achieving the firm’s objectives.

 

Independent women
Another pleasingly circular way in which Afore XXI-Banorte is engaging with and assisting women to improve their financial future is through offering microloans. This stimulates small and local enterprise and increases independence, income, and education of women in their own communities, which brings attendant benefits to those around them. Afore XXI-Banorte, through its investments, has provided credit to more than 400,000 women in rural and urban communities in Mexico, and it did this via the mechanism of one of its investments in a CKD portfolio – development equity certificates that provide credit to individuals while also benefitting from the future success of the resulting enterprise.

Offered exclusively to women, these investments provided microcredit in different communities that do not have easy access to financing, as well as development tools applicable to different areas of their lives, such as financial education, training, and incentives for entrepreneurship, among others. The resulting information is then fed into the Retirement Funds Administrator (Afore)’s annual report and is considered part of its ESG alternative portfolio strategy.

 

Improving the system
In 2020, Mexico approved a relevant pension reform that helps to address many of the most urgent issues with the pensions system. That being, flexibilising the investment regime by establishing sophisticated glidepaths, reduction in management fees and more than doubling the contribution rate in the next four years. All of this will help address the most important challenge in achieving a higher replacement rate (the proportion of an individual’s pre-retirement income they continue to receive after retirement), and perhaps the greatest obstacle to this is informality in the workforce.

In 2020, Mexico approved a relevant pension reform that helps to address many of the most urgent issues with the pensions system

This is a factor that has deep historical and cultural roots in Mexico that may take many more years to address. Mexican workers come in and out of the formal workforce during their working lives, and this reduces the time they make contributions to their pension funds. A Mexican may spend 40–60 percent of their professional life in the informal market, which will not include a structure to save for pensions.

Mexican women are over-represented in this pattern, given that they tend to take on a greater proportion of domestic and child-rearing responsibilities, which could mean many years out of the formal workforce during their lives. Women in Mexico live to an average age of 79.2 years compared to 74 for men. This means that older women who may have spent decades of their lives away from the formal workforce and whose husbands may have done the same, earning instead through informal means, may find themselves struggling to make ends meet in their later years or worse, living in poverty.

Afore XXI-Banorte is hoping to shift this trend by making pension savings accessible to all and fostering a change in attitudes and in structures that allow for improved pension savings and replacement rates.

The pension reform is a step in the right direction that tries to address the most relevant problems of a pension system, but additional work must be done to achieve better results, and this addresses a more difficult and long-term task, financial education.

 

Saving for the future
Against the backdrop of saving for the future, financial literacy and communication can present an important opportunity for pension providers to educate and encourage low-earning Mexicans about the need to save for retirement simply and without significant impact on take-home wages. To this end, Afore XXI-Banorte has focused on developing communication strategies that allow it to connect with less financially educated clients by using simple and colloquial communication, ensuring that the information is understandable by anyone.

This has been achieved by simplifying the language of advertising and messaging for the product to increase familiarity, since understanding what an Afore is involves a certain degree of complexity.

Accessibility is key to this messaging, and different savings channels are offered so people can choose where they want to save according to their activities and position in life. From convenience stores and banks to the institution’s own website and mobile app, the aim is for people to build, saving little and often as part of their financial plan, making retirement part of their investment.

Afores have come a long way in recent years, but there is still more to achieve. By maintaining a focus on financial education and high service standards, Afore XXI-Banorte aims for people to enjoy a dignified retirement after all their productive years through a robust investment process that has sustainability as the highest priority to ensure a better future for everyone.

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