EUROPE - According to the IMF, German Pensionskassen can survive a low-interest rate environment for several years - but the organisation sees pension book reserves held on balance sheets becoming a problem.
In its most recent assessment of Germany, the International Monetary Fund (IMF) stated that “soundness indicators” in the insurance sector, including Pensionskassen and Pensionsfonds, had “remained generally healthy” despite the global financial crisis.
One of the major challenges the IMF identified for the near future is the low-interest environment “where strains may build up over time”.
The organisation noted that the effect of increasing liabilities because of low interest is amplified by guarantees in the insurance sector.
“Nonetheless, analysis suggests insurers could cope with low rates for at least five years due to conservative accounting of both assets and liabilities,” the IMF said.
However, it added that, over the long term, longevity risk “could turn out to be significant” despite conservative actuarial assumptions.
Pension assets on companies’ balance sheets might be posing a much more immediate risk, the IMF said.
These “may become more of a burden” and “may prove expensive” in a low interest rate environment - “especially because a relatively high discount rate is applied (currently 5.1%)”.
According to the IMF, on-book liabilities comprise more than half of total pension claims and amount to about 10% of GDP.
Meanwhile, the IMF also published a comprehensive report on pension reforms in the CEE region, including most recent developments that saw some reforms being retracted.
The organisation noted that while the switch to pre-funding pensions in the form of a second pillar had caused an increase in deficits in many CEE countries, over the long term, this measure will help stabilise public finances.
The IMF suggested a new approach to calculating debts and deficits as the current methods offered “only a partial picture of public finances at a particular point in time” and “do not take into account the implications of current policies for future public finances”.
Instead, the medium-term goals for every country set out in the Stability and Growth Pact should be used for calculations, the organisation said - echoing earlier calls by a number of EU countries to take reforms to their second-pillar reforms into account.
For the CEE countries, it advised against a full debt financing of pensions to include fiscal consolidation.
“In Hungary, for instance, the recent pension ‘un-reform’ created a false sense of additional fiscal space, which allowed the implementation of tax cuts that could have otherwise been avoided,” the IMF said.
Additionally, countries should increase contributions to the second pillar to make it more attractive for workers, while governments should be aware that these reforms take time.
It noted further that pension fund regulations and supervision needed to be “revisited in a number of countries” to ensure that fees and administrative costs are “contained”, while also allowing for a diversification of investments and an extended life cycle for portfolios.