Effects on the Argentine Financial and Capital Markets of the Proposed Abrogation of the Individual Capitalization Pension System

On October 21, 2008, the President sent to Congress a bill (the "Bill") which provides for the unification of the Integrated Retirement Pension System (“Sistema Integrado de Jubilaciones de Pensiones” or "SIJP") in a single Retirement System to be known as Integrated Argentine Retirement System (“Sistema Integrado Provisional Argentino” or "SIPA") with the consequent elimination of the current system of capitalization. In relation with the main provisions included in the Bill which would modified the pension and retirement system ruled by Law No 24,241, please see the article “Bill introducing changes to the Pension and Retirement System” published in this edition of Marval News.

Since their creation the Private Pension Funds (“Administradoras de Fondos de Jubilaciones y Pensiones” or "AFJPs") have become the largest institutional investor in the financial and capital markets of Argentina. As of October 15, 2008, the total value of investments made by them amounted to A$ 84.816.769.764 (aprox. US$ 26,588,329,079), of which approximately 55.80% was invested in operations of public credit of the Argentine state and in public bounds.

With regard to the banking system, on 10/15/08 the AFJPs held term deposits amounting to a total of A$ 7,001,168,852 (aprox. US$ 2,194,723,778) which represented approximately 6.19% of total of the term deposits of the banking system, (please note that no account is taken of indirect investments in bank deposits made by the AFJPs through mutual fund.

In connection with the domestic capital market, the impact is equally significant. The total value of investments made directly in shares of public companies amounted A$ 9,036,438,458 (aprox. US$ 2,832,739,328) equivalent to 5.89% of the market capitalization of local companies listed on the Buenos Aires Stock Exchange, (again please note that the indirect participation made by the AFJPs through mutual funds was excluded). In addition, in the case of eleven (11) listed companies the participation of AFJPs represented more than 20% of the total shares and in thirteen (13) listed companies the participation of AFJPs represented between 10% and 20 % of the shares.

Furthermore, the AFJPs are investors with a strong presence in the negotiable private debt security markets (with a total investment of A$1,513,553,032 [aprox. US$ 474,468,035]), the mortgage backed securities market (with a total investment of A$59,939,136 [aprox. US$ 18,789,697]) direct investment funds (with a total investment of A$95,185,054 [aprox. US$ 29,838,574]), structured trusts (with a total investment of A$4,031,794,813 [aprox. US$ 1,263,885,521]), consumer loans backed securities (with a total investment of A$ 1,204,324,575 [aprox. US$ 377,531,214]) productive and infrastructure investment projects (with a total investment of A$481,800,939 [aprox. US$ 151,034,777]) and regional investment projects economy (with a total investment of A$1,209,193,488 [aprox. US$ 379,057,519]).

The filing of the Bill has caused certain concerns in connection with the implications that a potential modification of the retirement regime could have in the development of the domestic capital markets. 

Section 7 of the Bill specifically provides that resources which integrate the individual capitalization accounts of the members of the private capitalization system of the SIJP shall be transferred to the National Administration for Social Security (“Administración Nacional de la Seguridad Social” or “ANSES”) in order to contribute such amount to the Sustainability Guaranty Fund of the Public Pension Regime (“Fondo de Garantía de Sustentabilidad del Régimen Provisional Público de Reparto” or “FGS”), created by Decree No 897/2007.  

This FGS which, among other purposes, has the aim of investing any surplus in the public pension regime, is managed by the ANSES and is authorized to invest in a wide variety of investments including public debt instruments (up to 65% of the total assets – which can be increased up to 100% of the assets of the FGS with the ANSES estimate a provisional surplus for the following three fiscal years-), agreements entered in future markets and securities issued by Provinces, Municipalities and Autarchic Entities (up to 30%), private debt securities (up to 40%), fixed term deposits in local or foreign currency (up to 10%), corporations’ shares (50%), mortgage backed securities (40%) and shares of mutual funds (20%).  

Based on the above the following potentially undesired effects of the proposed amendment of the Pension System have been stressed: 

(i)            a risk of possible reduction of the volumes of the transactions made in the capital markets, which could negatively affect the value of assets traded in those markets and the future issuing of new securities.

(ii)           a potential reduction in the liquidity of the banking market as a consequence of the concentration of the parts to be made by the FGS in a limited number of financial entity.

(iii)          a decrease in the demand of securitization instruments traded in the capital markets in term may have a negative impact in the consumer and mortgage credit market.

Taking into account the preliminary stage of the legislative treatment of the Bill it is difficult to ascertain the impact that a future amendment of the pension system may have in the performance and developments of the local capital market.