Pensions aid Peru’s financial troubles

The landscape of Peru’s pension provision sector has been subject to many changes – from the introduction of the Private Pensions System to increased digitalisation. Prima AFP has managed to successfully navigate these hurdles

Based in Peru, Prima AFP has wide-reaching in-store and mobile facilities to help make banking easier for those more  

Peru is one of the world’s fastest-growing economies. As the country sees its rapid advance towards economic maturity, its pension industry is being updated accordingly. Although it was formulated in 1992, Peru’s pension industry is still in a state of flux with many changes afoot, such as the reform of the Private Pensions System, which was introduced in 2012. Much change is still required.

Up to three quarters of the workforce is not engaged in formal work, and is therefore underserviced by insurance. While this shortfall is set to decline with the increasing formalisation of the nation’s workforce, a cultural shift that prioritises private pension planning is also needed. Mrassociates spoke to Renzo Ricci Cocchella, CEO of Prima AFP, to get an understanding of how this is being achieved and what barriers and threats remain.

Alongside this, Cocchella also gave an insight into the working of his own firm, including how it is managing its own fund, the steps taken to increase pension coverage in the Peruvian economy, and its enduring commitment to corporate social responsibility.

How has the pension funds market changed in Peru recently?
We have gone from having a free market to having a tendered one. New affiliates must belong to the AFP that win the tenders for the next two years. Tenders are won by offering low costs while sacrificing the quality of the service, advice and information clients receive. As such, workers who enter the Private Pension System are not able to choose their AFP. This has generated a series of problems that impede the growth of the Private Pension System, and simultaneously strengthen the state system of pensions. The AFPs that remain after the winner is chosen are not able to access this market of affiliates until two years have passed.

Another aspect is consumer behaviour. Today, clients are much more demanding and anxious for information on their fund and its profitability to ensure their future pensions.

What challenges is the market in Peru still facing?
Today, people judge a product without having duly processed pertinent information. We still do not have pensioners who have created 100 percent of their savings in the Private Pension System. In this context, we have retirees whose pensions are not necessarily aligned with the expectations they have of income levels. We will only be able to see the results once we have pensioners who have contributed regularly to their AFPs over a 45-year period.

Another challenge is to be closer to our clients to both increase our credibility and gain their trust. Due to disinformation, many myths have been perpetuated about the AFP that we are working to dispel by providing objective information through our spokespeople.

Finally, we have the challenge of expanding coverage to include more people in the system. As an industry, we cover only 30 percent of Peru’s population – the other 70 percent is not familiar with us or discards working with us because they do not know about the benefits we offer. This situation will turn around once the job market formalises and more young people have access to an AFP.

How can these challenges be overcome?
We have been very active in resolving the doubts that our clients have due to disinformation, and have focused on improving our customer service experiences.

Another challenge we face is that 70 percent of the economy is informal. The government must provide incentives for people to move from the informal to the formal sector. This would help the private pension system to increase the coverage and increase productivity. In that sense, we offer a product of voluntary contributions with the purpose that our customers continue to increase their pension fund and to ensure them a better retirement pension. As a result of this, we gain market share.

Today, clients are much more demanding and anxious for information on their fund and its profitability to ensure their future pensions

In terms of education within society, we challenge myths within the system with simple messages. First, we have educated and trained our staff to cope with correcting these. We also have been very active on social networks, promoting educational short videos and through mass media and radio with our spokespeople challenging myths.

How are your products and services tailored to this environment to meet customer needs?
Smartphone penetration is increasing, so we developed an application that allows customers to learn about their funds, movements, and a variety of other personalised information. We then created self-service modules, and implemented biometrics in modules for clients to use their fingerprint to be able to access their personal information and print it if they need to. Some populations are very difficult to reach, so we created the Prima-mobile, a mobile agency in a truck where you can find all the services we usually provide. We are the only AFP that provides this kind of service.

We have also implemented the Innova Project – a virtual platform created to encourage the generation of ideas within the organisation. Each member can create an idea that improves some aspect of our company.

These proposals may be supported by investors and then evaluated by the Committee of Innovation to be implemented. In three rounds we have had over 50 initiatives submitted, 13 of which have been approved and four have already been implemented in less than a year.

What is Prima AFP’s investment strategy, given the instability of the economy?
Prima has paid greater attention to alternative investments and manager selection, creating a dedicated team for that purpose. It acknowledges the positive risk-return contribution of alternative investments – namely private equity, real estate and infrastructure – and has put together ambitious long-term target allocations to substantially increase its currently low levels of allocation.

However, in order to preserve a multi-vintage and a well-diversified allocation into the asset class, it is currently pacing its commitments. With regards to manager selection, in circumstances where the investment team considers that the juncture or structural inefficiencies in a given market open an opportunity for alpha generation, the manager selection team has put together a robust process supported by world-class screening applications in order to improve the probability of picking the best performing funds in the category.

As for equities, we have constrained ourselves from security selection outside our Latin America scope – this also applies for corporate bonds – understanding our low likelihood of being able to compete against sophisticated and vastly more staffed teams covering those stocks domestically. All of our local portfolios are likely to be individual investments.

On the flipside, virtually all of our foreign investments are placed in index ETFs and in certain markets, usually accounting for a quarter to a third of our international exposure, through actively managed mutual funds.

CSR is increasingly important; how is it incorporated into Prima AFP?
We have put a lot of emphasis on CSR because we firmly believe that our institutional growth must go hand in hand with a commitment to the society and the environment. In 2015, were awarded accolades that mark the company’s active and voluntary contribution to improve the social, economic and natural environment.

Our social responsibility policy is based on general principles that promote activities such as good corporate citizenship, which seeks to ensure ongoing ethical and responsible behaviour to preserve the environment and improve the quality of life of our employees, as well as the community to contribute towards the country’s sustained development.

What is in store for Prima AFP’s future?
In December, Congress passed a draft law that allows affiliates the alternative to withdraw up to 95.5 percent of their pension funds when reaching the age of 65. Ollanta Humala observed this law in January.

In April, Congress insisted on adopting the law, and was promulgated despite the impact that it could have on the economy. This measure could possibly increase the proportion of adults without a pension, and also threaten their relatives or the state, which would have to uphold them if they spend all of their funds.

We are focused on overcoming the current period of political instability until a new president is elected. We have to be very active, explaining the system to politicians and candidates so they learn how the system works and understand its benefits.

In terms of investments over the last year and a half, we have been pursuing a world-class model of international investment, so our main goal is to consolidate this model in 2016. Towards our customers, we will continue improving our proposal of value according to their needs, always trying to exceed their expectations.

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