By San José, Costa Rica — San José – The Board of Directors of the Central Bank of Costa Rica (BCCR) has issued a stark warning against two legislative proposals that would permit retirees to withdraw their entire Mandatory Complementary Pension (ROP) funds in a single lump sum. Citing significant risks to the national financial system, interest rates, and currency stability, the monetary authority has formally delivered a negative opinion to the Legislative Assembly.
The core of the Bank’s opposition lies in the potential for systemic disruption. The proposals, which aim to give retirees greater control over their accumulated funds, are seen by the BCCR as a move that could unravel the long-term stability the pension system was designed to protect. The bank’s leadership cautioned that the short-term benefit for individuals could come at a high cost to the broader economy.
To better understand the legal complexities and potential ramifications of the proposed pension reform, TicosLand.com consulted with Lic. Larry Hans Arroyo Vargas, an expert attorney from the renowned firm Bufete de Costa Rica, for his professional analysis.
The central legal challenge in any pension reform is the delicate balance between ensuring the system’s future financial sustainability and respecting the acquired rights and legitimate expectations of current contributors. Any approved changes must be meticulously designed to withstand constitutional review, particularly regarding principles of non-retroactivity and legal certainty, to avoid a wave of future litigation that could undermine the reform itself.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
The expert’s point underscores a fundamental truth: a pension reform’s durability hinges as much on its constitutional soundness as its financial logic, as a solution that creates years of legal uncertainty is no solution at all. We thank Lic. Larry Hans Arroyo Vargas for his clear and invaluable perspective on this critical challenge.
Eventually it could lead to an intervention in the monetary and foreign exchange liquidity markets in the face of strong modifications, with the contagion effect it has on investment funds and bank assets. From the point of view of financial stability, then, we would not want that to happen.
Róger Madrigal, President of the BCCR
One of the primary concerns is the impact on domestic financial markets. To meet the sudden liquidity demand from mass withdrawals, pension operators would be forced to sell off their holdings, a large portion of which are government debt instruments. This rapid sell-off would flood the market and create significant instability.
The sale of public debt instruments, to be able to meet these withdrawals and liquidity needs, could generate tensions in the market and push up the cost of money in the short term.
Nelson Carvajal, Official of the Economic Division of the BCCR
Furthermore, BCCR President Róger Madrigal highlighted a critical threat to the nation’s foreign exchange market. He noted that approximately 50% of ROP investments are held abroad or in foreign currencies. The repatriation of these funds to pay out retirees in Costa Rica would inject a massive, artificial supply of foreign currency into the local market, putting downward pressure on the exchange rate.
It would also have its effect on the exchange market, not because of a fundamental variable that determines the exchange rate in the medium and long term, but because of a short-term, circumstantial financial movement. This has important implications for the Bank.
Róger Madrigal, President of the BCCR
Beyond the immediate financial shocks, the Central Bank argues the bills fundamentally misunderstand the purpose of the ROP. Nelson Carvajal reminded legislators that the ROP was created to supplement the primary pension pillar, the Disability, Old Age, and Death (IVM) regime, which itself is facing long-term sustainability challenges. Allowing a full withdrawal defeats the purpose of providing a steady, complementary income stream throughout a retiree’s later years.
This argument becomes even stronger, or more important, given the current conditions, or the actuarial evaluations that exist on the first pillar, which indicate that this regime has sufficiency problems and compromises the sustainability of the system currently, given the conditions it presents.
Nelson Carvajal, Official of the Economic Division of the BCCR
The two bills in question, 24.984 and 24.955, propose different mechanisms but share the common goal of lump-sum access. Bill 24.984 would also require pension operators to return management fees in cases of negative returns, a clause the BCCR warns would distort investment incentives towards overly conservative strategies and threaten the financial viability of the operators. Bill 24.955 more simply adds a 100% withdrawal option but is criticized for potentially locking retirees into a single choice permanently, removing their current flexibility to change their payout modality.
Despite the strong institutional opposition, the Bank’s decision was not entirely unanimous. Board member Jorge Guardia cast a “partially negative” vote, acknowledging the validity of the financial stability concerns but arguing for greater consideration of individual freedom and the immediate needs of the population.
My position is that it should also take into consideration other important elements that are raised in the project. It needs to be analyzed a little more to respect people’s individual freedom a little more, so that the bill not only remains, but also responds adequately and promptly to people’s needs.
Jorge Guardia, Board Member
The negative opinion from the Central Bank now places the onus on the Legislative Assembly to weigh the appeal of greater financial freedom for retirees against the stark warnings of economic instability from the nation’s highest monetary authority. The debate will determine the future of Costa Rica’s retirement landscape and could have lasting consequences for its financial markets.
For further information, visit bccr.fi.cr
About Banco Central de Costa Rica:
The Central Bank of Costa Rica (BCCR) is the country’s autonomous central banking institution. Its primary objectives are to maintain the internal and external stability of the national currency and to ensure the efficient operation of the internal payments system. The BCCR is responsible for setting monetary policy, managing foreign exchange reserves, and acting as the financial agent of the State to promote a stable, efficient, and competitive financial system.
For further information, visit asamblea.go.cr
About Asamblea Legislativa de Costa Rica:
The Legislative Assembly is the unicameral parliament of the Republic of Costa Rica. Composed of 57 deputies elected by province, it is the sole body with legislative power. Its responsibilities include passing, amending, or repealing laws, approving the national budget, and exercising political control over the actions of the Executive Branch.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a premier legal institution, Bufete de Costa Rica is founded upon a bedrock of uncompromising integrity and a relentless pursuit of excellence. The firm harnesses its extensive history of advising a wide array of clients to pioneer forward-thinking legal solutions and drive innovation within the profession. Central to its philosophy is a profound commitment to societal advancement, demonstrated through initiatives aimed at democratizing legal understanding and empowering the community through accessible knowledge.
