Low interest rates undermining pension funding

By La rédaction | March 12 2013 08:37PM

Since the 2008 financial collapse, low interest rates have plagued the bottom lines of many firms, including insurers, which rely on (higher) interest rates from their investments to boost profits.

Low interest rates are also partly to blame for the rise in the number and magnitude of pension deficits. In October, DBRS released a report on the funding status of 451 Canadian and U.S. DB pension plans from 2002 to 2011. DBRS said an increasing number of plans slid into a “danger zone of underfunding,” identifying 80 per cent as a reasonable funding threshold. Under this threshold, more than two-thirds of plans reviewed were underfunded by a significant margin.

But by taking on increased derisking plans from employers, what had been a thorn in the side of insurers could well turn into a rose.

“Low interest rates are not just the U.S., it’s not just the UK, it’s not just Canada, it’s a global phenomenon,” said John Aiken, insurance analyst with Barclays Capital. “Given the fact that the expectations that the low interest rate environment is here to stay for a while, this could conceivably be a growing business for the insurers.”