The Mexican Pension Annuity Market purchased from other insurance companies paying a single premium, and this amount is registered as acquisition cost of the annuity company.<sup>9</sup> It is important to point out that the same mortality table used for basic benefits is used for additional economic benefits (CNSF 2006h).

The regulatory framework for pricing of pension annuities in Mexico has the potential for making the basic annuity offered an unbalanced product. This is a risk for both providers and annuitants.

For providers there is a concrete possibility that technical profit margins are quickly eroded if technical rates are not adjusted rapidly. For instance, the long term real interest rate in the case of _10 yr Udibonos_<sup>10</sup> has decreased from around 7.14 percent in October 1999 to 4.30 percent in December 2005 and has been increasing gradually to reach a level of 5.09 percent in June 2006<sup>11</sup> ; in the case of _20 and 30 yr PICs_<sup>12</sup> the long term real interest rates have passed from 6.14 and 6.12 in October 2001 to 5.96 and 5.92 in November 2002 respectively and in the case of 20 and 30 yr CBICs<sup>13</sup> the long term real interest rates decreased from 6.16 and 6.21 percent in January 2003 to 4.59 and 4.68 percent in December 2005 in that order; while the technical rate of 3.5 percent real has not been modified (see section II.E).

The mortality tables used are experimental tables based on population averages and annuity companies would need to develop their own annuitant mortality tables when sufficient mortality experience is accumulated. This is especially urgent since pension policy changes introduced in 2002 have altered the demographic assumptions at the basis of the pricing framework adopted in 1997 so that the IV annuitant pool is quickly degenerating (see section III). Since 2000 the CNSF has prepared some studies in order to analyze the adequacy of the experimental market tables. However since 2002, the trends of the mortality have changed and it is necessary to collect statistical market information for at least five years to propose a new table.

> 9 In the case of life insurance benefits the corresponding reserves are constituted by the life insurance companies (sellers).

> 10 Pension annuity companies have large positions of government bonds known as UDIBONOS (Bonos _De Desarrollo Del Gobierno Federal Denominados En Unidades De Inversión_ ), PICs ( _Pagarés de Indemnización Carretera con aval del Gobierno Federal_ ) and CBICs ( _Certificados Bursátiles de Indemnización Carretera con aval del Gobierno Federal_ ) that have maturities between seven and 28 years. 11 For 10 year UDIBONOS, the auctions average result reached the lowest real annual interest rate level (3.89 percent) in October 2003.  Source: Banxico.

> 12 The highway indemnification promissory notes, know as PICs were issued until December 2002, as part of the support program for the rescue of the highways under Concession.  These notes were endorsed by the federal government.  The annual interest rates correspond to the auctions results.  Source: Banxico and Banobras.

13 CBICs were issued since January 2003. The interest rate considered is the CBIC real annual interest rate of the monthly auctions results. Source: Banxico and Banobras.

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