Fixed income strategies of insurance companies and pension funds: new report from the Committee on the Global Financial System

Today the Committee on the Global Financial System (CGFS) released a report entitled Fixed income strategies of insurance companies and pension funds. The report was prepared by a Working Group chaired by Peter Praet, Member of the European Central Bank's Executive Board.

Insurance companies and pension funds are at the intersection of major developments. Having weathered the financial crisis, they now face important changes in international regulation and accounting standards. At the same time, their business models and balance sheets remain exposed to the low-interest rate environment.

Against this backdrop, the report examines how life insurance companies and pension funds might alter their investment strategies and asset allocations, and assesses the likely consequences for market functioning and funding of various economic sectors arising from such changes.

While accounting and regulatory changes bring important benefits in terms of financial soundness and disclosure, they also have potential implications for financial markets. These include possible shifts in sectoral funding, a greater emphasis on liability-driven investment strategies and the use of derivatives, and a reduced role in the provision of long-term risk capital. In addition, the low-interest rate environment may reinforce the ongoing trend away from guaranteed return products and defined benefit plans, leading to greater household exposure to financial fluctuations.

The report details these implications, subject to remaining uncertainties about transitional arrangements and the final shape and calibration of the proposed accounting and regulatory rules.

CGFS Chairman Mark Carney said that the system-wide perspective adopted in this central bank report can help to inform current debates on international accounting and regulatory changes.