Low interest rates could yet spell the end for pension funds - IMF

The IMF used its half-yearly health check of the global financial system to advise that the unexpectedly benign environment that has prevailed since the UK’s vote to leave the EU in June cannot be relied upon to continue indefinitely.

The IMF said the impact of record-low interest rates on pension funds and insurance companies incorporated for almost a decade now, the fragility of banks, rapid credit growth in China, and the heavy indebtedness of the corporate sector in emerging countries could yet prove disastrous.

In its global financial stability report (GFSR), the IMF said: “The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates,” the IMF said in Low interest rates add to the legacy challenges facing many insurance companies and pension funds, along with those from ageing populations and low or volatile asset returns.

It adds: “Heightened concern over these important long-term saving and investment institutions could encourage even greater saving, adding to financial and economic stagnation pressures.”

The GFSR goes on to warn that regulators and supervisors are not yet prepared to protect insurance company and pension fund balance sheets, including identifying risks of insolvency and funding gaps.

The IMF said: “Many pension funds face funding gaps, where the present value of future liabilities exceeds the market value of their assets.”