Pensions Hit By Dropping Bond Prices

May 28, 2004

PENSIONS Superintendent JavierCascante is urging people with retirementplans to be prudent when making decisionsinvolving the money they have placed involuntary pension funds.“The affiliate must understand that in thecase of pensions, the most important thing isto save in a way that in the long run – at thetime of withdrawal – it delivers positiveyields,” Cascante explained.“These are historical yields, which, inthe case of Costa Rican pension funds,are similar to those delivered by pensionfunds in other more developed countries,”he said.During the last two months, $200 million– about 50% of all the dollars pensionfunds managed – have been withdrawn fromdollar pension funds. An additional ¢28 billion($64.52 million) – about 20% of themoney managed by colón pension funds —have been withdrawn from colón pensionfunds.The yields of most voluntary pensionfunds have dropped sharply recently as aresult of the recent drop in the price of CostaRican Central Bank and Finance Ministrydebt bonds in anticipation of an increase inU.S. interest rates.THE drop in bond prices caused sharplosses in the country’s dollar and, to a lesserextent, colón investment funds (TT, May 14,21). Given that 81% of the money managedby pension funds is invested in Costa Ricanbonds, the drop in prices resulted in heavylosses.Fearing even larger losses, thousands ofinvestors withdrew their money from thepension funds, according to the Super-intendenceof Pensions (SUPEN).As was the case with the investmentfunds, people taking money out of the pensionfunds forced operators to sell bonds.More bonds on the market made their pricedrop even further, resulting in more losses.SEVERAL financial advisors reportedlyurged people to withdraw from the pensionfunds, further adding to the panic,according to the superintendent.Cascante urged people to remain calm,and insisted the losses are the result of aprice correction and not a problem with theCosta Rican economy.The bonds the pension funds haveinvested in are reliable and will continue topay good yields, he said, adding that thosewho stay in the funds will recover theirmoney in the medium term.JUST in the past week, the price of thebonds has begun to recover as a result ofincreased demand because of the low priceat which they are being sold.

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