The current low interest rate environment poses a significant risk
for the long-term financial viability of pension funds and insurance
companies, as they seek to generate sufficient returns to meet promises,
according to a new OECD report.
The inaugural edition of the OECD Business and Finance Outlook says the main concern is that pension funds and life insurance companies might become involved in the "search for yield" in order to match the levels of returns promised to policyholders and beneficiaries when interest rate were higher. This poses risks including insolvency.
"Generating the resources needed to confront the challenge of ageing populations will require a better global allocation of resources to the most productive investments but without excessive risk-taking," said OECD Secretary-General Angel Gurría launching the report in Paris. "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 report also cites a very real risk that the current trend for companies to return cash to shareholders via dividends and buybacks, in order to boost short-term returns, means that capital will not be reinvested in more productive activities. This will hurt innovative investment and productivity growth. There are also risks building up from greater leverage and riskier investment in higher-yield and complex products with poor liquidity.
The inaugural edition of the OECD Business and Finance Outlook says the main concern is that pension funds and life insurance companies might become involved in the "search for yield" in order to match the levels of returns promised to policyholders and beneficiaries when interest rate were higher. This poses risks including insolvency.
"Generating the resources needed to confront the challenge of ageing populations will require a better global allocation of resources to the most productive investments but without excessive risk-taking," said OECD Secretary-General Angel Gurría launching the report in Paris. "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 report also cites a very real risk that the current trend for companies to return cash to shareholders via dividends and buybacks, in order to boost short-term returns, means that capital will not be reinvested in more productive activities. This will hurt innovative investment and productivity growth. There are also risks building up from greater leverage and riskier investment in higher-yield and complex products with poor liquidity.
