Private pension funds woo Argentine labor

Despite initial problems, the new funds should provide workers with more choices than the troubled state system

A BLITZ of advertising has swept Argentina since early May, as 21 new pension funds try to lure workers away from the state-run system.

This has been possible because the National Congress passed a pension-reform law that took effect early this year.

About 5.5 million workers have until July 1 to decide if they want to sign up with a private company. But the initial shift has been slow as workers remain wary of handing over their money. ``People don't trust people here, and you're asking people to give money to a private company for the following 40 years,'' says Fernando Coccaro, an analyst at Pistrelli Diaz Associates, an arm of United States consulting firm Arthur Andersen.

``There also was bad publicity,'' Mr. Coccaro says, that hampered the start up. It included last month's resignation of three top officials in the government agency serving as a pension-fund watchdog. Workers also were upset with a lack of information about the system and a requirement - now dropped - that they couldn't return to the state system.

While it's difficult to pin down numbers, the 21 funds have drawn about 500,000 people. Meanwhile, companies have spent close to $100 million on marketing.

Despite its faltering, many analysts say the new pension network is a positive step.

Problem-ridden state system

The state system has had many problems, from workers who haven't paid into it to officials who siphoned off funds. After decades of contributions, many retirees are collecting pensions of only $150 a month. Last year, the government was forced to wait for proceeds from the sale of Yacimientos Petroliseros Fiscales, the state oil company, before it could retire a multimillion-dollar debt to pensioners.

The private system's major contribution will be creating a financial option for future retirees.

The economy and its capital markets will be the most immediate beneficiary of the private pension funds. Once the system is running (probably not for another year), it is expected to collect about $2.5 billion annually. At least 90 percent of the capital from the pension funds must stay in Argentina. Therefore, analysts say, the system could fuel development of Argentina's capital markets by creating mortgage-backed securities, securitized loans, and other investment vehicles that now don't exist.

The new funds also will give the country an alternative to foreign capital, especially if interest rates abroad go up and inflows of foreign capital decrease.

The pension funds are ``a positive development for the country despite the beginning problems,'' says Timothy Gibbs, president of Buenos Aires Capital Partners investment bank. ``There will be more of a supply of funds to invest. And this should inspire greater imagination on the part of the users of the funds.''

More credit will be available

Many analysts say the new capital will loosen credit lines and increase loan size for small and medium-sized businesses. Interest rates should drop. Easier access to credit could reach the consumer, increasing availability of home mortgages and giving housing a boost. ``With new capital markets, there should be different and new instruments of credit ... with more funds to lend to enterprises,'' says Jose Delgado, an economist at the Fundacion de Investigaciones Economicas Latinoamericanas.

While the new pension system is unique, analysts say it resembles Chile's system of the early 1980s. The pension funds are marketed directly to employees, rather than through the company. Each worker can choose from among 21 competing funds; in the US, workers usually go with the pension plan employers choose.

The Argentine system gives each person more choice, but it also has led to extravagant ad campaigns and costly sales forces as funds try to outsell each other. Many observers say workers are funding ad campaigns through costly commission fees. The present system may seem complex to an employer, who needs a good computer system and personnel to keep track of which employee is signed up with which fund. ``The spending on sales and advertising and marketing does make the system more expensive, but these costs should go down as people sign up,'' says Luis Rodriguez Villasuso, director of Siembra, a fund in which Citibank has a 49 percent stake. ``But you give more decisionmaking power to the individual, so its a trade-off.''

The Argentine system is a defined contribution system. Most US employees are members of defined benefit plans - they know how much money they'll get at retirement. US pension firms hedge funds in financial markets, hoping to turn a profit while still meeting future obligations to workers.

Argentine system subscribers assume more risk and profit. They know their monthly contribution, but they don't know their retirement benefit. Payout is tied to fund performance - although no fund can give a return under 70 percent of the average of all funds. (The law includes safeguards to guarantee workers' deposits, but the federal government is not underwriting private funds.)

By the end of 1995, analysts say they expect up to 3 million workers to have their money in private funds.

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