IN THE KITTY

Peru 2015 | FINANCE | VIP INTERVIEW

TBY talks to Renzo Ricci Cocchella, CEO of Prima AFP, on the role of the private pension system and the challenges to overcome.

Prima is one of the country's four private pension funds (AFPs), which have been an engine of growth in Peru for many years now. How has your association with Credicorp given you a competitive advantage?

Prima AFP was launched in the market in 2005, and entered the private pension system as the fifth AFP. Prima AFP was launched as an alternative, with a value proposition based on a strong backing by Credicorp, experience in investment management, permanent information and assistance, and an adequate service fee. Along the way, we acquired another AFP, Union Vida, in 2006. Our growth rate increased during the subsequent years, during which time we fought to become the market leader. We achieved that goal in 2010. Being part of Credicorp, the top Peruvian financial group, is an advantage. The group has 126 years of financial experience in Peru. Prima AFP maintains the philosophy of innovation, change, and new products and also the values, solvency, experience, and quality of all of Credicorp's enterprises. Also, the quality of the management team provides a further advantage.

What are the system's main challenges?

I believe that the system faces three important challenges. First is the need to expand the pension systems' coverage. Our country's informality rates are high. This is a challenge for the Peruvian state, which must formalize the economy through policies, incentives, and benefits that motivate workers and companies to increase formal employment. This will give more Peruvians access to a pension upon retirement. Second is the need for education on the private pension system. There are still many doubts about the roles and benefits of the AFPs. As a point of self-criticism, I would have to say that in the last 22 years the AFPs have not communicated the system's benefits effectively. We need to be more creative and proactive to build trust and satisfaction in our customer base. Thirdly, we need to improve replacement rates, which is the ratio of the pension obtained by the affiliate at the time of retirement divided by the average salary of the last few years of his or her working life. Although this rate is increasing, efforts need to be made to ensure that this ratio follows an upward trend to eventually reach 70% of the average salary.

“There is a huge market in Peru for investment in infrastructure in different sectors."

What have been, and will be, your preferred strategies for investing in Peru's infrastructure boom in the years to come as the government announces more projects?

There is a huge market in Peru for investment in infrastructure in different sectors. According to one of the most recent studies on this matter, Peru's infrastructure gap will exceed $80 billion this decade, which is roughly one-third of estimated GDP. This infrastructure gap speaks with Peru's 105th place out of 144 countries in terms of “quality of overall infrastructure" in the latest WEF Global Competitiveness Index. However, bureaucracy appears to be holding up investment that is needed in order to close the gap. It is important to mention that around 10% of the industry's assets under management are invested in infrastructure, but we would like to increase that percentage. Prima invests in this sector along the entire capital structure of projects and companies, both directly, providing long-term indebtedness, and indirectly through dedicated infrastructure funds. For us, it is very important that the project has a strong business case and well-balanced risk and return profile.

Last year, the total returns were around 9% across all AFPs, which is a solid performance. What do you expect from 2015?

In 2014, we achieved first place in funds number two and three. It is not true that all of the AFPs have the same return. The difference between the first and the last place is significant. We are always trying to occupy the forefront of the market. It is important to mention that just one percentage point of difference with the average in the long term could affect the pension to the tune of 30%. In 2015, there is a lot of uncertainty in the market. I consider that diversification is going to be the best strategy. We would like to have a foreign investment limit not only of 42%, but of 50%, and in the future 80%. It is important to mention that, during 2014, we took our investment practice to a whole different level, much more aligned with major league players around the globe. Thus, Prima AFP worked on a robust strategic asset allocation (SAA) framework to ensure that portfolios were well rewarded in the long term for every unit of risk taken. As a part of the SAA, we enhanced our investment and risk management teams. In terms of governance, our risk management practice traditionally focused on regulation, and compliance has been better integrated with the investment process while setting a well-rounded risk appetite and budget to ensure prudent risk taking aligned with the investment goals of each fund. Also worth noting is our significant IT investment on risk management, portfolio management, trade execution, and front-to-back integration, among other tools that we believe puts us at the top of our industry not only locally but in the Latam region.

© The Business Year - April 2015