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In recent years, supplementary pension operators (OPCs) have increased their managed funds’ investments in international investments, particularly in the compulsory supplementary pension system (ROPC). For example, in the past five years, the absolute amount of international investments in ROPCs has almost quadrupled, while the average portfolio participation of all OPCs has increased from 13% to 33%.
Visited: Is the U.S. heading for a recession? Here will be the consequences for Costa Rica
The reason for this situation is the exponential growth of pension funds managed by pension operators and the impossibility of adequate diversification if resources remain entirely within Costa Rica. Given the lack of local options, if not invested abroad, resources will have to be allocated to the purchase of government bonds, which today are already highly risky if purchased in conjunction with other countries with separately funded pension plans; that is, managed by companies similar to Costa Rica’s OPC.
Greater international investments mean that pension funds are more exposed to what happens in these markets. The US market in particular accounts for the largest share of the value of companies listed on global stock exchanges. That is why it is easy to understand how international economic events can affect the returns of pension funds, which in the long run will lead to the growth of pension funds, which are much higher than regular contributions to individual accounts.
For example, international crises such as covid-19, the war between Russia and Ukraine, or specific events such as the Ukrainian elections USAincreasing investors’ risk perception and potentially generating high volatility and negatively affecting the value of international instruments, leading to temporary losses for pension funds.
To be precise, since August, the stock market has experienced such fluctuations due to the increasing possibility of the US economy falling into recession and the increasing expectation of interest rate cuts by the Federal Reserve. Interest should be raised sooner rather than later.
If such a realignment were to occur, the likely impact on pension funds would depend on a variety of offsetting forces.
firstlower interest rates will lead to a positive revaluation of bonds that make up local and international pension funds, as the Costa Rican Central Bank is expected to follow the Fed’s lead to avoid further deteriorating changes in interest rates.
Ranked secondthe actions of the US market could have two effects. On the one hand, among the positive effects, lower bond rates will prompt investors to invest more in stocks, pushing up stock prices. In addition, lower interest rates stimulate investment and consumption, which is generally good for a company’s sales and profits, and thus the value of its stocks. On the other hand, if a recession does occur in the United States, it will have the opposite effect due to the loss of jobs and consumer income. Either way, the result will be more volatility in international markets, and the investments of pension funds managed by OPC are now facing greater risks.
It is necessary for the public to understand these concepts and regard them as Recurring situations that will continue to occurFailure to do so could lead them to make bad decisions with their pension savings funds, such as switching operators in bad times, causing them to suffer losses that they cannot recover later. This advice is even more important on the eve of the implementation of intergenerational fund regulations, which will further increase exposure to international markets and make returns on a group of affiliates even more volatile.
Nor does the previous situation mean that OPC will be given a blank check, as more active and significant access to international markets requires greater risk management responsibilities that are absent when managing a more basic portfolio, but with lower worker performance.
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