NORWAY – The Norwegian central bank has flagged up the impact of low bond yields on pension funds – and said that the maximum return can be lowered.

“With today’s low bond yields, it may become difficult over time for life insurance companies and pension funds to achieve the return they have guaranteed customers in defined benefit pension schemes,” Norges Bank said.

“If the yield on long-term government bonds remains at a sufficiently low level, however, the authorities can for new policies lower the maximum return that can be promised to customers in pension schemes,” the central bank said in its new financial stability report.

It said low government bond yields “have increased the demand for securities with relatively high returns, with an attendant risk of a fall in prices when interest rates rise”.

Real estate was providing some yield, Norges Bank commented. It said: “In the search for yield, commercial property has become more attractive as an investment vehicle for both institutional and private investors.” Life insurers’ holdings of commercial property rose by 16% last year.

Meanwhile the central bank said it would buy foreign exchange equivalent to NOK360m (€45m) a day for the Petroleum Fund in June.