_Mexico: The 1997 Pension Reform_ _10_

- _management problems,_ including frequent management turn-over and insufficient attention to the program's technical details and operating characteristics;

- _poor accounting, coordination, and monitoring_ due to the lack of a single organization responsible for SAR operations. This has caused problems in the collection of SAR contributions, in the reconciliation of amounts received, and in the settlement of the accounts administered by the commercial banks, the Central Bank, and the social security or housing institutions;

- _multiple identification numbers for individual contributors_ as a result of the use of "RFC" numbers (Taxpayers Federal Registration Code). Duplicate accounts at banks have risen to almost half of the 20 million accounts now registered. Multiple RFC's have been generated by employers, workers, and even banks. Moreover, since employees did not choose where to open their accounts, many of them ignore in which banks they have an account;

- _poor account administration and collection functions by commercial banks,_ due largely to the disincentives to banks brought by low commission ceilings and the small size of SAR accounts. Banks joined the SAR in 1992 under political pressures so they have relatively little incentive to provide these services satisfactorily, particularly to smaller firms with fewer employees. This problem has been compounded by the incentive for commercial banks to maintain good relationships with corporate clients rather than enforce adequate collection of SAR contributions;

- _extremely high concentration of accounts_ with 75% of the accounts held in 3 Mexican banks; and

- _INFONA VIT's financial performance_ is seriously affected by the following problems which were not addressed by the 1992 reform: 42% of workers who received a housing credit have 12 or more delinquent monthly payments; INFONAVIT's personnel is excessive relative to its functions; and since workers do not have a single ID number INFONAVIT's capacity to collect credits is very limited. Table 4 highlights the negative rates of return in housing investments that INFONAVIT has given to workers between 1993 and 1995.

**Table 4: SAR Balances - Private Sector Workers**

||**(millio**|**Accumulated**<br>**Balauc**<br>**n{33tg3**<br>**pesos)**|
|---|---|---|
|Period|Retirement|Housing|
|Dec. 1993|5,178|8,699|
|Dec. 1994|9,009|15,178|
|Dec. 1995|17,616|22,293|
|Dec. 1996|28,153|37,115|
|Nov 1997**a/**|**37,850**|56,283|

Source: CONSAR and INFONAVIT a. Nov. 1997 exchange rate was 8 pesos per US$1.

The 1992 SAR exemplifies how a pension reform should not be done. The SAR will be remembered as a **frustrated effort at** buildng a second pillar. Nevertheless, the SAR experience contains lessons for the 1997 reform as well as for other reformers that are studying alternatives for substituting or complementing PAYG pension systems. The policy makers responsible for the 1992 reform:

- did not focus on the implementation of the system after the legislation was approved and created a regulatory agency only after two years of implementation;

- . used political pressures to force banks into individual account record-keeping, controlled fees and canceled banks' profit maximization decisions upon entering (and leaving) the SAR; did not care about a proper ID number for workers and trusted existing codes plagued with problems;

- created individual accounts but the owners were not allowed to choose the account managers. Instead, they put the decision in employers' hands and simply replicated banking concentration in the SAR; and