CEIOPS highlights interest-rate volatility

EUROPE – CEIOPS, the European pensions supervisory committee, has highlighted that marking liabilities to market values means that interest rates will become a “real element” in pension fund risk management.

“Based on market interest rates to value liabilities the outcome of the financial situation is not clear upfront,” the Committee of European Insurance and Occupational Pensions Supervisors said.

It noted that the decline in long-term interest rates in the second half of 2004 hit solvency at pension funds and insurance companies as liabilities rose by more than the value of fixed income assets.

It said: “The opposite effect of the interest rate movement on the financial position of the insurance and pension industry under marking to market shows that volatility in interest rates will a real element in the overall risk management of pension funds and insurance companies.”

The comments came in a Financial Stability Report drafted earlier this year and recently made public.

The Frankfurt-based committee said that 2003 seemed to be a “turning point” for pension funds and insurers in the EU.

“Based on the traditional way of valuation of the liabilities, the financial situation of insurers and pension funds in 2004 has improved, mainly due to favourable investment results. However, based on market interest rates to value liabilities the outcome of the financial situation is not clear upfront.”

Meanwhile, a group representing European banks and insurers have reiterated its call for a lead financial market supervisor.

The European Financial Services Roundtable said “the European prudential supervisory framework has to be made more efficient and more effective”.

A lead supervisor encompassing CEIOPS and its sister committees covering banks and securities markets would foster cross-border integration of financial markets and make crisis management more effective.

Fortis chief executive Jean-Paul Votron, who sponsored the new report, said: “The institutional set-up of financial supervision in Europe currently is a patchwork of different and sometimes inconsistent regimes where responsibilities and procedures can be unclear.”