While stimulative monetary policy is needed to support the global economic recovery, this “low-for-long” scenario creates risk for the global financial system, and for the pension industry in particular. As you know, institutional investors such as insurance companies and pension funds are often expected – or in some cases even required by contract or mandate – to deliver a target rate of return.
In many cases, these targets are now unrealistic and can be met only by taking on more risk than is prudent. Changes in accounting rules, which use low, risk-free interest rates to discount liabilities while valuing assets at current market prices, increase the pressure to achieve these high returns on a continuous basis.