Record-low interest rates are putting the solvency of pension funds and insurance companies at risk, according to an OECD report published June 24.
Low rates are making it difficult for these organizations to match the yields previously seen when rates were higher; these yields are needed to deliver the levels of returns promised to beneficiaries and policyholders.
This could lead to a growing number of insolvencies in this field, according to the study.
“Generating the resources needed to confront the challenge of aging populations will require a better global allocation of resources to the most productive investments but without excessive risk-taking,” Angel Gurria, OECD secretary-general said.
“Above all, much remains to be done to strengthen the ability of the financial system to absorb shocks and avoid the bubbles and busts of recent decades.”
The value of pension funds is expected to grow 26% globally over the next five years, according to the report, to an estimated US$36 trillion. Low interest rates will mean low returns, as these funds invest about 40% of their assets in low-risk investments such as government bonds.
“If interest rates remain low into the future, funds and insurers may find their assets insufficient to meet their promises, unless they adjust their pension or payment promises,” the OECD said in a media release.
“To reduce insolvency risks, insurers may need to offer lower guaranteed returns on new contracts to reduce liabilities and, in extreme cases, renegotiate current terms.”
This could lead to existing pension plans being terminated. As well, new employees could be offered “less attractive” pension plan terms in the future.
