Pensions Reform: Risk-Based Supervision in Costa Rica
Project Development Objective (PDO)
This project is designed to implement an effective risk-based supervision (RBS) methodology that will enable pension funds to adopt sound risk management procedures, to hold appropriate level of capital, and to take advantage of dynamic financial instruments and markets in Costa Rica.
The private pension system in Costa Rica comprises mandatory work-based defined contribution pension accounts, some defined benefit occupational pension funds, and voluntary defined contribution accounts. The Superintendent of Pensions (SUPEN) is responsible for supervising these pension funds to protect the system’s stability and participants’ benefits.
The proposed technical assistance is aimed at guiding the Costa Rican government in implementing risk-based supervision. The expansion of Costa Rica’s private pension system in recent years has presented challenges to the supervisor. Despite the significant volume of pension assets managed, supervision remains mostly compliance based, and involves limited risk assessments.
SUPEN sees RBS as a step forward in better understanding the risks of pension funds in Costa Rica. Currently, the supervisor lacks a dynamic process for identifying and responding to serious risks as they emerge to prevent damage to participants’ future pensions or to system stability. Also, the staff members of SUPEN require capacity building to effectively implement the RBS. Finally, current legislation needs to be upgraded to be consistent with international best practices and to provide for an effective implementation of risk-based supervision.
To support the planned implementation of risk-based supervision by SUPEN, the project team is developing a diagnostic report and roadmap to (a) advise on how the development of risk-based supervision should be further adapted to local circumstances and (b) outline the recommended policy and regulation changes. In addition, the project team is supporting SUPEN in drafting guidelines on technological infrastructure support, a methodology for calibrating risks, options for the reorganization of supervisory functions, revised procedure manuals, and other guidance notes by drawing on its experience with projects in other jurisdictions.
The project is also providing proposals for revising legislation to help mitigate identified risks that are currently outside the remit of SUPEN, as well as facilitating the implementation of risk-based supervision. In addition, it is delivering a tailored training program on the concepts, methodologies, and practice of risk-based supervision, as adapted for Costa Rica, to SUPEN staff members.
Implementing risk-based supervision should result in a better and more structured understanding of the risks in the private pension system. This understanding should result in the biggest risks being managed more effectively by pension fund administrators, under the guidance of SUPEN.
These enabling outcomes should improve the efficiency of the pension system, the security of affiliates’ benefits, and the public and affiliate confidence in the system, ensuring its long-term sustainability. These results should be reflected in funding ratios, investment diversification, and consequently, portfolio returns.
The project should also enable the safe implementation of a revised investment regime that will deliver better risk-adjusted returns over the long term and increase financial sector stability.