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European pension funds facing prolonged low-yield environment

The risk of a prolonged low-yield environment has intensified in the last six months and remains the key challenge for European insurers and pension funds.

19 DEC 2019 | CHRIS SEEKINGS
Solvency pressure on European pensions ┬ęShutterstock
Solvency pressure on European pensions ©Shutterstock


That is according to the European Insurance and Occupational Pensions Authority (EIOPA), which yesterday published its December 2019 Financial Stability Report.

It explains how a sharp decline in longer-term yields continues to put pressure on the solvency positions of pension funds and insurers.

These have deteriorated in the first half of 2019, and low-interest rates are expected to put further pressures on capital positions going forward, in particular for life business.

Meanwhile, a weakening economic outlook, growing trade tensions, Brexit and increased downside risks have ushered in a new round of monetary policy easing by central banks.

"We continue to see the clear benefits of Solvency II, as the market-consistent and risk-based regulatory framework has helped price in the risk of low-interest rates, build resilience and enhance risk management practices," said EIOPA chairman Gabriel Bernardino.

Despite considerable pressures, the European insurance sector remains well capitalised with a median solvency ratio of 212%, although significant disparities remain across undertakings and countries.

The low-yield environment also has implications for long-term profitability, according to the report, with insurers finding it increasingly difficult to meet guarantees issued in the past.

This could trigger further search for yield behaviour by insurers and pension funds, which could add to the build-up of vulnerabilities in the financial sector if not managed properly.

Moreover, concerns over debt sustainability and stretched valuations across financial markets could give rise to a sudden reassessment of risk, causing investment losses.

The report also explains how low-interest rates are affecting the current values of defined befit pension obligations in almost all member states, with asset values impaired significantly too.

"It is important that the regulatory framework continues to remain robust in the future and adequately reflects the risks faced by insurers," Bernardino continued.

"As such, it is crucial that these elements are addressed in the currently ongoing Solvency II review to ensure that promises can continue to be met in the future."


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