Author: Tom Bailey
25 Jun 2015
In this era of low interest rates, the solvency of pension and insurance schemes is in peril, according to the annual OECD Business and Finance Outlook report for 2015. While the worst of the crisis may be over, many governments have been cautious about raising interest rates, lest they damage their fragile economic recoveries. For instance, the Federal Reserve recently declined to
aise interest rates in the second quarter of 2015, despite some optimistic signs of a US economic recovery.
While the worst of the crisis may be over, many governments have been cautious about raising interest rates
At the launch of the report in Paris, OECD secretary-general, Angel Gurria said, “The current low-growth, low-interest rate environment poses particular problems for pension funds and life insurers. These financial intermediaries, who offer long-term financial promises, rely on investment returns to honour their obligations.”
Pension funds and insurers typically invest heavily in fixed income securities such as government bonds, though loose monetary policies are resulting in even lower yields from this asset class. “If interest rates remain low into the future,” the report warns, “funds and insurers may find their assets insufficient to meet their promises, unless they adjust their pension or payment promises.”
The outcome of this, according to Gurria, is that “[i]ncreasingly… pension funds and life insurers are feeling the pressure to chase yield themselves, and to pursue higher-risk investment strategies that could ultimately undermine their solvency. This not only poses financial sector risks, but potentially jeopardises the secure retirement of our citizens.
“As pension funds and insurers allocate more capital to alternative assets, and increasingly interact with the shadow banking system, regulators and policy-makers will need to remain vigilant,” he added.