Pensions and Insurers Face Bleak Future in Europe

(June 11, 2012)  —  Corporate pension funds and insurance companies in Europe will struggle further against growing deficits and sliding capitalisation as the continent continues to find a way out of its troubles, an industry body has said today.

In its bi-annual review, the European Insurance and Occupational Pensions Authority (EIOPA) said capital ratios of insurers had started to decrease and these companies remained vulnerable to the extended low-interest rate environment that shows little sign of improvement.

Low-yielding investments were hurting defined benefit pension funds in the region and both sides of the sector remained critically connected to “potential adverse developments on sovereign and banking exposures”.

“The insurance sector remains vulnerable to a possible long-lasting low interest rate environment, though the sector would be capable to cope with this challenge for some time. But this situation might look different in case of renewed turmoil, a failure of governments to stabilize their fiscal situations or a disruptive unwinding of currency risk. While the first order effects of such events seem to be limited and are likely to hit only local insurers, the second order effects might hit bigger European insurers.”

The report highlighted the United Kingdom and Netherlands, which have the largest number of defined pension funds and assets therein, as being particularly affected by recent market turmoil. EIOPA said national regulators were dealing with the situation domestically.

“With regard to macroeconomic developments, the Financial Stability Report concludes that the political and economic climate continues to weigh on growth prospects in Europe,” the report stated. “Uncertainty over the euro area government debt level and political situation in some European Union countries continues to influence markets even after the recently made strong policy responses.”

Over the weekend, Spain was granted access to a bailout fund to support its banking sector and the likelihood of Greece exiting the Eurozone has been openly discussed over the past couple of weeks as a distinct possibility.