FI-analysis 13: Low for long and large annuity payments

Theprevailing low interest rate environment is challenging for pension managers who pledge a guaranteed rate of return to their beneficiaries.

A well-known problem is that the present value of guaranteed benefits increases when market rates fall, which has a negative impact on the financial position of the undertakings. A lesser-known problem is that traditional methods for bonus allocation can weaken the undertakings' solvency position over time if interest rates were to remain persistently low. This is because the bonus allocations in such a scenario create annuity payments that are too large.

This analysis shows how much bonus allocations can weaken the undertakings' solvency positions in a persistent low interest rate environment. It also shows that undertakings with a high percentage of paid-up pension policies, as well as policies with instalment premiums, are most vulnerable.

Finally, the analysis shows that there are alternative models for bonus allocation that would reduce the negative solvency effects of annuity payments in a low interest rate environment

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