Private pension funds could be at risk

SAN JOSE, COSTA RICA – September 25th, 2012 – According to La Republica, the Spanish-language financial newspaper, the nation’s private pension funds, known as OPC’s, could be at risk. Almost the entire $11 billion placed in these funds are invested inside Costa Rica, 80% of which are invested in government bonds or state institutions.

The fact that all of these funds are concentrated in the public sector may be risky, as their return depends almost 100% on the public sector. And if something goes wrong, all those who contribute will suffer.

One option to reduce risk is to invest outside of Costa Rica, in both developed markets such as the United States, as well as emerging markets, such as Brazil. The option is certainly a possibility, as up to 20% of the portfolio in OPC’s can be invested outside of the country. The idea of investing outside of the country is not only to diversify in country and currency, but also to gain access to additional investment vehicles, as there are few long-term investment options in the country.

Another unhealthy result of pension operators being so concentrated in government bonds? It turns out that in the end, it is not the earnings on these investments which will pay Costa Rican’s pensions, but rather citizens themselves, through taxes or government debt.

Currently, only 3 of the 7 OPCs invest in foreign securities. “Popular Pensiones”, “BAC Pensiones” and “BN Vital” invest between 2% and 7% of their portfolio outside of Costa Rica, in Treasury bonds, multilateral banks, and some investment funds with AAA rated shares.

But why do they not invest more than that, if those who manage the funds understand the risk that clients are taking in having their funds concentrated in one sector? The answer is that the interest rates for investing locally are very high, whereas investing at an international level does not return such a high yield. They also avoid investing in volatile instruments with higher yields, such as stocks.

The exchange rate risk is another factor that keep OPCs from investing outside Costa Rica, because contributors invest and are paid in colones.

“Currently, when investing in foreign instruments, when the time comes to convert the funds into colones, they produce real return rates which are negative, because our inflation is close to 5% yearly, whereas investing in colones produces positive return rates, “ explained Alejandro Solorzano, manager of Vida Plena OPC.

Juan Carlos Salas, manager of P2 International, said: “ What I have seen in Costa Rica is that many entities in general make short term decisions instead of long term decisions. The goals in investment funds are of short, medium and long terms, however, the investments are made and measured in short terms.”