Mexico Mulls Taking On $53B of Oil Pension Liabilities

Two state-owned companies could be relieved of a significant chunk of pension liabilities if new oil sector rules are passed by Mexico’s government.

The Mexican government is set to take on a significant proportion of the country’s biggest oil producer’s pension liabilities in an effort to free up capital for other projects, according to reports.

The government is considering taking on roughly 700 billion pesos ($53.3 billion) in pension liabilities from Petroleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE), state-owned oil producers and electricity providers, according to Bloomberg.

The pension changes are part of a wider set of new legislation being considered by Mexico—including the introduction of tax rules for Pemex and CFE, and contract guidelines for private producers—aimed at opening up the country’s oil sector from Pemex’s near-monopoly.

In return for offloading more than a third of their liabilities, Pemex and CFE would be required to reduce their remaining liabilities within 12 months, Bloomberg reported. This is likely to involve a shift from a defined benefit (DB) scheme to defined contribution (DC). Any changes would have to be agreed by workers’ unions as well as the oil companies.

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According to Reuters, Pemex and CFE have combined pension liabilities of roughly 2 trillion pesos ($152 billion).

Mexico’s public pensions were switched from DB to DC in 1997, and in the past few years the Afores—pension fund managers—have been given gradually greater investment flexibility from the country’s pension regulator.

London-based insurer Legal & General expects to downsize its annuities division as demand plunges for its once-obligatory retail products, a spokesperson confirmed to CIO.

In March, the UK Chancellor caught much of the industry by surprise by abolishing lifetime income product mandates for retirees.

For Legal & General and its competitors in the retirement business, the reform’s first effect was deeply depressed share prices. The stock, trading under the ticker LGEN, has largely recovered from its March 31 low of $204.69. The firm does not anticipate its individual annuities business will likewise rally.

“We believe the individual annuity market will shrink by as much as 75% by the end of 2015—down 50% for 2014, and down a further 50% in 2015,” Legal & General’s spokesperson told CIO. The firm has already seen a 40% drop in sales during the quarter following the reform’s announcement. “Legal & General’s retirement business requires fewer staff to deal with the lower sales volumes.”

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Management began engaging with staff on downsizing plans at the company’s administrative center in Cardiff, Wales on July 29. No employees have yet been made redundant. When the consultation concludes, roughly 60 employees will likely be cut loose, according to a BBC report.

Legal & General took steps to diversify its annuity business away from the retail market during the last calendar year. Its 2013 annual report cited changes in regulation or legislation “that may have a detrimental effect on our strategy” as the corporation’s foremost risk. Last June, it completed the purchase of pension buyout specialist Lucida for roughly £149 million. Reinsuring New Ireland’s €600 million annuity book added another institutional revenue stream, as did underwriting £4.9 billion of pension scheme risk from BAE Systems.

“We expect retirees to take their pension savings in cash, use income drawdown, or turn to other existing or new income-related products to provide their retirement income,” Legal & General spokesperson explained.

“But, we are also working on the development of new products and retirement solutions, which we believe will generate more business in the future. These developments have been taken into account when making the decision to reduce the number of people we employ in this part of our business and will enable us to keep the potential job losses to a minimum.”