retirement annuities in mexico - amisamis.org.mx/informaweb/documentos/archivos/3...© 2012 towers...

© 2012 Towers Watson. All rights reserved.

Retirement Annuities in Mexico

Situation, Opportunities, Barriers and Suggested Approaches

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© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Mexico is a middle-income economy

$3,627

$8,400

$11,640

$15,266

$32,644

$38,582

$48,112

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

India China Brazil Mexico EuropeanUnion

High income:OECD

UnitedStates

GDP per Capita, 2011 (in current $, PPP)

World Average $11,594

Source: The World Bank Group, World Development Indicators – WDI Online; United Nations Foreign Direct

Investment (WIR 2012 data).

Situation

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Life expectancy at retirement is increasing

Source: United Nations World Population Prospects, Extended Country Profiles.

1950-1955 1980-1985 2010-2015 2020-2025 2040-2045

France 13.6 16.6 20.8 21.6 23.0

Canada 13.8 16.4 20.1 20.8 22.3

Germany 13.5 15.5 19.3 20.3 21.8

UK 13.3 15.3 19.3 20.1 21.7

US 15.0 16.6 19.3 20.1 21.6

Mexico 12.1 15.7 18.4 19.2 20.6

China 8.7 13.9 15.5 16.5 18.1

Turkey 10.9 12.1 15.4 16.2 17.8

Russia 15.6 14.3 15.1 15.8 17.0

India 9.8 11.9 14.0 14.7 16.1

Life Expectancies at Retirement (Age 65)

Situation

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Fertility rates are expected to dip below replacement in the near future

Source: United Nations, World Population Prospects, The 2010 Revision

0

1

2

3

4

5

6

7

8

Ch

ildre

n p

er w

om

an

Mexico

Replacement Rate

Fertility in All Countries

1950-1955 2010-2015

India 5.9 2.5

Mexico 6.7 2.2

United States 3.5 2.1

France 2.8 2.0

United Kingdom 2.2 1.9

Brazil 6.2 1.8

Canada 3.7 1.7

China 6.1 1.6

Russia 2.9 1.5

Germany 2.2 1.5

Situation

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Current favorable demographics won’t last

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Ratio of 20-64 to 65+ year olds

Source: United Nations, World Population Prospects, The 2010 Revision

Old-Age Support Ratios of All Countries

2010 2050

Brazil 7.0 2.0

Canada 3.5 1.5

China 6.8 1.7

France 2.7 1.5

Germany 2.4 1.1

India 9.8 3.8

Mexico 7.1 2.3

Russia 4.2 1.9

United Kingdom 2.8 1.6

United States 3.6 1.8

Situation

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0

25

50

75

100

IRLM

EXG

BRJPN

NZL

USA

BELG

ERK

ORC

ANC

HIA

USFRA

CZE

NO

RSW

EPO

RFINSUI

ITATUR

ISRH

UNA

UTD

ENESP

NED

GR

EIS

L

Public pensions in Mexico are insufficient to secure

retirement for many

Gross pension replacement rates

Public, mandatory schemes for average worker

5

Average: 57.3%

Source: OECD, Pensions at a Glance, 2011, p. 121.

Situation

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6

Private retirement income needed to fill the gap

0%

20%

40%

60%

80%

100%

0.50 0.75 1.00 1.25 1.50 1.75 2.00

Other sources

Social Security

Retirement income goal relative to earnings

Preretirement earnings level

(multiple of average wage)

Many modern day analysts and retirement planners put target

retirement income at around 70 to 80 percent of preretirement

earnings for people to maintain living standards

Source: OECD Pensions at a Glance: Pension Calculator.

http://www.oecd.org/els/socialpoliciesanddata/pensionsataglancepensioncalculator.htm

.

Target Income GAP

44% for AWW

Total Mandatory Pension Schemes

Situation



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Mexico annuity market is relatively small today

7

Deferred Immediate

Life

Oth

er

Source: OECD

Denmark

Belgium Ireland

Sweden

USA

Australia

Mexico Chile

Germany

Singapore

UK

Canada

South Africa

Switzerland

Netherlands

Significant Medium Small

Index-linked

Situation

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Employees want more retirement security . . .

40%

47%

53%

63%

67%

32%

51%

55%

60%

67%

68%

30%

25%

26%

22%

22%

39%

20%

28%

19%

19%

17%

29%

28%

21%

15%

11%

29%

29%

17%

20%

15%

15%

Russia

China

Mexico

Brazil

India

Japan

France

Germany

UK

US

Canada

Retirement security more important issue over last three years

Agree Mixed Disagree Source: Towers Watson 2012 Global Workforce Study.

Developed

economies

Fast-growing

economies

Opportunity

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. . . And are willing to pay for it

34%

65%

68%

73%

78%

28%

47%

48%

59%

59%

60%

33%

20%

19%

21%

17%

42%

20%

31%

25%

27%

25%

33%

16%

13%

6%

5%

30%

33%

21%

16%

15%

15%

Russia

Mexico

Brazil

China

India

Japan

France

Germany

UK

US

Canada

Willing to pay a higher amount from paycheck each month to

ensure guaranteed retirement benefit

Agree Mixed Disagree Source: Towers Watson 2012 Global Workforce Study.

Developed

economies

Fast-growing

economies

Opportunity

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69% 66% 62% 60% 56% 58%

11% 12%13% 13%

10% 9%

18% 20% 22% 25% 27%34% 33%

72%

10%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011 2012

-12

DB

Hybrid

DC

DB

Private pensions continue to grow in number . . .

10

Source: CONSAR, October 2012.

Number of

plans 1,629 1,702 1,793 1,809 1,832 1,946 2,002

Opportunity

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1,015 1,022 1,121 1,114 1,113

1,349 1,255

40 51 65 54 56

58

54

20 24 28 36 38 22

41

80%

100%

2006 2007 2008 2009 2010 2011 2012

vested

retirees

active

. . . Participants covered . . .

11


Number of

participants

(´000)

1,075 1,097 1,214 1,204 1,206 1,430 1,350

Opportunity

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202

325 349

331

376

412 416

2006 2007 2008 2009 2010 2011 2012

. . . And supporting assets

12


Opportunity

In MXN Billion

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Private retirement plans predominantly pay lump sums

An estimated 1,700 lump sum payments are made annually in Mexico

Without a distribution strategy

No “available” instruments to manage that money

No financial literacy

In contrast, only a small percentage of retirees choose an annuity per

year

Lack of advice/short term view

Need good advice and attractive and competitive alternatives

13

Barriers

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Corporate pension accounting rules don’t price pension obligations at settlement value

Discount rate based on current market conditions at YE

(around 7% for YE2012)

Insurance discount rates are more conservative

(3.5% for contracts under Social Security Law)

14

Barriers

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Except for defined contribution plans, funding is not mandated

There are no funding requirements in Mexico

Only 50% of DB pension plans are funded

Companies fund for tax reasons

15

Barriers

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Clarify goals of all interested parties

Suggested Approaches

Interested Party Objective

Employer Attract, retain and engage the right employees by providing

a competitive and cost effective rewards program

Employee Have the financial means and tools to support lifestyle when

no longer able to work

Government Provide retirement security across the broad cross section of

society

Insurance

Industry

Grow insurance market by building a profitable pension

business that addresses the need for retirement income by

deploying capital and using expertise in longevity and credit

underwriting

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Enable the system to do its job

Need to rescale the retirement system to provide basics without

impoverishing the future

Give those able to work longer the incentives to do so without

harming those who cannot

Must acknowledge that defined contribution savings are a critical part

of retirement security

Must provide an attractive and efficient means to convert

accumulated cash into dependable lifetime support

17

Suggested Approaches

retirement annuities in mexico - amisamis.org.mx/informaweb/documentos/archivos/3...© 2012 towers...

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