The trend of de-risking corporate defined benefit pension plans calls into question the viability of the insurance companies that assume the obligations, according to a new report from the International Monetary Fund.
In its most recent assessment of the U.S. financial system, the IMF cited similar concerns raised in the Financial Stability Oversight Council’s annual report released in May. The FSOC, established under the Dodd-Frank Act in 2010, is chaired by Treasury Secretary Jack Lew and charged with monitoring interconnected systemic risk in financial markets.
The IMF report notes that insurance companies’ investment reserves have been hurt by the prolonged period of low interest rates.
Insurance companies invest the preponderance of assets in fixed income. A 2013 report from the Federal Reserve Bank of Chicago shows that more than 75%, or more than $2.5 trillion, of the U.S. life insurance industry’s general account assets are invested in bonds.
That’s compared to 2.3% of assets that are invested in equities.
As interest rates have hovered at historic lows since the financial crisis, insurance companies have been forced to assume more risk where possible in search of yield, according to the IMF’s report.
Some firms have increased allocations to private equity, hedge funds, real estate assets and lower rated corporate bonds.
“Large life insurance groups in particular have expanded nontraditional business, provide complex guarantees, and remain exposed to macroeconomic risks,” said the report.
One expansion of nontraditional businesses has come in the form of pension de-risking schemes.
Total annuity de-risking sales reached $8.5 billion in 2014, a 120% increase over the previous year, according to LIMRA’s Secure Retirement Institute’s Group Annuity Risk Transfer Survey.