IMF Warns of Systemic Risk of Pension De-Risking


More and more companies are opting to de-risk their pension plans by transferring the financial risk of pension liabilities to a willing insurer.

But the International Monetary Fund (IMF) warned in a report this month that the practice could threaten the stability of the U.S. financial system.


In a report on the state of the US financial system, the IMF detailed the results of its latest stress tests of banks and insurers. It expressed concern regarding the lack of data available from some firms, meaning the longer-term effects of increasingly large pension-risk transfers on insurers were unknown.

“The transfer of pension risk to the insurance industry, through ‘longevity swaps’ and other insurance products, increases the interconnectedness of the system,” the IMF’s report said.

The IMF cited the Financial Stability Oversight Council’s (FSOC) annual report, published in May, which noted the growing number of counterparties arising from pension-risk transfers “as well as changes in the type and amount of financial counterparty risk”.

“In the case of buyouts, the beneficiaries have their credit exposure shifted from the pension plan to the life insurer,” FSOC said. “Accordingly, the backstop for pension plans switches from the Pension Benefit Guaranty Corporation to the state insurance guaranty funds. In the case of longevity swaps, the counterparty risk is like that of other derivatives and resides with the dealer or insurer.”

The IMF also highlighted underfunded private sector pensions as a potential source of “systemic risk”.

Read the full report here.

Photo  jjMustang_79 via Flickr CC License

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