The greatest danger that in underdeveloped countries lies in wait for Pension funds, is the possibility that the purchasing power of the accumulated resources will decrease. In other words, it is the threat that the amount of goods and services that can be purchased with the money that the funds hold will be reduced. This is so because that purchasing power is what will allow the owners of the funds, who are the ones who have been contributing them over the years, to be able to cover their needs after they retire. Evidently, it would not be desirable that when that moment arrives they find that the pension they are going to receive is not enough to sustain them, and then they fall into deplorable living conditions, or are forced to continue working in whatever appears, or have to be supported by family and friends, or turn to public charity.
The purchasing power of the funds is determined by their volume and by inflation. If inflation were zero and all prices remained unchanged forever, the amount of money accumulated would be the only determinant. But if it isn’t, and we know it isn’t because we are aware that prices change, inflation erodes some of that purchasing power. However, since the money in the funds is not kept in a safe or under a mattress, but is invested in order to generate a return, it is expected that this return exceeds the loss caused by inflation, in order to that the growth in the volume of accumulated resources more than offsets the effect of inflation.
That is precisely the work that AFP perform in their capacity as administrators of the funds, and in this sense the results have shown that the real performance of the resources, discounting inflation, has been consistently higher than the established minimum. The selection of the investment destination involves a delicate balance between profitability, liquidity and risk.
