This review assesses the Mexican pension system on the basis of OECD best practices in pension design and presents various proposals to improve the Mexican pension system and guarantee its sustainability in the long term.

This review assesses the Mexican pension system according to the OECD best practices and guidelines, and draws on international experiences and examples to make recommendations on how to improve it. The main findings and recommendations are presented below.

This chapter briefly describes the objectives of the review of the Mexican pension system. It presents a brief historical background to the changes experienced by the Mexican pension system since the 1990s. This review provides recommendations, using OECD best practices in pension design, on how to improve the Mexican pension system with the ultimate goal of ameliorating the retirement income that people may receive from the pension system.

This chapter succinctly describes the Mexican pension system. The Mexican pension system is mainly based on funded defined contribution individual accounts introduced in 1997 for private-sector workers and in 2007 for public-sector workers. The public pension component consists of the old pay-as-you-go defined benefit pension system, which still covers workers who entered the labour market before the introduction of funded defined contribution individual accounts, a minimum guaranteed pension and an alternative means-tested non-contributory pension for people older than 65.

This chapter first describes the public pay-as-you-go defined benefit pension system. It presents and discusses the eligibility criteria for the contributory schemes and the benefit levels for both private and public-sector workers. It gives an overview of the financial prospects of pension provision and highlights the strong fragmentation of the pension system in Mexico. Secondly, the chapter focuses on issues related to the design of the minimum contributory pensions and of the elderly safety nets. It concludes with pension policy options to improve the design of the public provision.

The sharp drop in pension benefits to be expected after the transition period from the old defined benefit (DB) system to the new defined contribution (DC) system may lead to disillusionment with the new DC pension system. This sharp drop is the result of low contribution rates, which were set at levels similar to those existing before the reform, and high promises to transitional workers based on the old DB formula. In this context, people with similar labour histories separated by a few months would have drastically different pension benefits. Moreover, the low coverage rates and contribution periods compound this problem. This chapter explains how this situation comes about and presents alternatives to smooth-out the transition period. The chapter also discusses approaches to increase coverage, contribution levels and contribution periods.

This chapter focuses on the accumulation phase of the funded defined contribution part of the Mexican pension system. It looks at the different investment strategies adopted by pension plans (SIEFORE) within the framework of the multi-funds age-related scheme. It also discusses the impact of existing investment restrictions, issues related to fees charged to members and the different approaches implemented to increase competition and reduce fees, risk-based supervision, governance and regulation. The chapter concludes with some recommendations that allow more choice on investment strategies, address high charges and increase competition among pension funds (AFORE).

This chapter discusses the current structure of the pay-out phase of the Mexican funded defined contribution pension system and proposes approaches to improve it. The chapter first introduces the main modalities that exist in Mexico to allocate assets accumulated in individual retirement accounts and thus finance retirement income. Individuals can generally choose between programmed withdrawals and life annuities. Only one type of life annuity is allowed. The chapter also discusses the problems with annuity markets and the management of longevity risk by insurance companies and occupational defined benefit pension plans. It concludes with recommendations regarding the management of longevity risk, the operation of the annuity market and the regulatory framework.