The International Monetary Fund (IMF) has issued a strong warning to pension funds and insurance companies that if interest rates remain this low for a continued period of time, many of them will become insolvent. The IMF said the monetary policy of many countries will have side effects in the long-run, despite the supposed good they are accomplishing now. The post-recession policy for most central banks has been to keep interest rates low in order to boost borrowing and to grow the economy. In its Global Financial Stability Report (GFSR), the IMF said “The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates… Low interest rates add to the legacy challenges facing many insurance companies and pension funds, along with those from ageing populations and low or volatile asset returns. Heightened concern over these important long-term saving and investment institutions could encourage even greater saving, adding to financial and economic stagnation pressures.”
The warning comes along with other conditions the IMF said need to be rectified in the near term. Their biannual report stated that short term risks had reduced, but major issues facing global markets included the fragile state of the banking industry (bad loans and reduced profitability), the slowing growth of the Chinese economy and its growing credit, and the high debts of corporate sectors in emerging economies. The result is a poor return on investments and uncertainties moving forward. The IMF also stated that the relative calm since Brexit won’t last and that governments should be working on ways to sift out trouble areas and come up with long-lasting solutions. The over-reliance on monetary policy is costing the economy much more than its getting. A major issue facing pension funds is the funding gap. “Many pension funds face funding gaps, where the present value of future liabilities exceeds the market value of their assets,” the report continued. If the situation persists, protectionism might set in, causing people to save more for the long term, which would then slow growth further.