Pension risk transfer to insurance companies could increase systemic risk in the U.S. financial system, the International Monetary Fund warned in a new report.
The authors, who work with IMF’s financial sector assessment program, said in the report that “the transfer of pension risk to the insurance industry, through ‘longevity swaps’ and other insurance products, increases the interconnectedness of the system.”
For pension fund executives, “pressure to improve returns could spur undue risk-taking, whether via direct credit exposure or through securities lending and cash reinvestment,” said the report, “U.S. Financial System Stability Assessment.”
While noting “welcome steps” taken to improve the U.S. financial system, the authors called on the Financial Stability Oversight Council to do more, including creating enhanced standards for systemic non-banks, and addressing “key fault lines” in housing finance, money market mutual funds and repurchase and securities lending markets.
Asset manager supervision should include explicit requirements for risk management, internal controls and stress testing, they said.
“New pockets of vulnerabilities” include redemption risks that are rising as a result of leverage and maturity transformation. “Insurers have taken on greater market risk and could be faced with negative equity in a downside scenario,” the authors said.
With non-banks now accounting for 70% of financial sector assets, “insurance companies, hedge funds, and other managed funds contribute to systemic risk in an amount that is disproportionate to their size,” the authors — Aditya Narain, Martin Cihak and Simon Gray — said.