_35_ _Mexico: The 1997 Pension Reform_ In the near future there will be pressure to reduce these commissions, in order to boost investment returns on pension contributions. Better returns are imperative to reduce fiscal costs for transition workers and to improve retirement benefits for new workers to a level above the government minimum guarantee.

The typical pattern is for the AFORE to charge a one-time up front fee; in fact, 7 of the 17 plans have imposed a frontload charge averaging 1.67% of covered pay. But as Table 2 shows, another 7 plans impose both a one-time pay-based charge totaling 1.27% of pay and an additional annual 1.03% of assets. The remaining three plans charged either an annual percent of assets alone (4.75%), a fraction of annual real returns alone (33%), or a commission levied on both contribution amounts and returns. It should be noted that these commissions correspond to first-year rates only. In most cases, the pension plans indicate that they will reduce commissions charged to participants who remain in that AFORE for a longer period of time. The declining commission pattern is intended to discourage workers from moving their money into a new AFORE, as soon as cross-fund transfers are permitted in September 1998 for the first time.

The data presented compares administrative cost figures for the Mexican pension commissions - (affiliate-weighted) expressed as a single, one-time, front load, with those of four other Latin nations.. , , ,

|C v<br>:<br>-<br>|ini**Latin Anieric.n**<br>t.<br>|
|---|---|
|Coun,<br>~~~~~~~ ~<br>|_%_of Coy. Pay<br>~~Country<br>% of Cov. PayI<br>|
|Argentina|2.410|
|Chile|2.291|
|Peru|2.294|
|Uruguay|2.070|
|<br>**Mexico**|**1.919**|
|_Simple Av._|_2.197_|

Another challenge to the Peru 2.294 Mexican reform lying in the months Uruguay 2.070 ahead is the problem of AFORE agents **Mexico 1.919** aiming at "switching" affiliates among _Simple Av. 2.197_ AFOREs. In Chile, Argentina, and other countries, prevailing fee Source: CONSAR (1997), p. 19-20. regulations induce "armies" of AFP Note: Mexican data affiliate-weighted as of I April 1997 agents, a torrent of account transfers, All computations assume commission isa 1-time frontloaded fee. and a considerable increase in operation costs.

**Moral hazard concerns.** All privately run pension systems with mandatory contributions suffer from some general moral hazard. However, the Mexican reform may induce two additional sources of moral hazard. First, the government guarantees a MPG irrespective of the aggressiveness of the investment strategy chosen by the workers. This could encourage near-retirement workers whose investments have significantly under-performed to "bet the bank" at the government's expense. This effect is compounded by the lack of a minimum return requirement. Second, the implications of the life time switch option. Nevertheless, these sources of moral hazard are mitigated by three factors: (i) the majority of transition workers (65 %) are under 32 years of age; (ii) workers will have their own individual retirement accounts as opposed to a hypothetical Government guarantee; and (iii) initially the investment regime will be quite restrictive.