Swedish pension schemes and providers have been warned that the continued low-interest-rate environment increases their dependence on riskier assets and, therefore, they should have buffers in place to manage these risks.

Sweden’s financial regulation, Finansinspektionen (FI) made the remark in its report on the stability of the country’s financial system.

“Swedish insurance undertakings and occupational pension undertakings are very dependent on the future development of the financial markets. The low market rates that have persisted for a long time have resulted in growing challenges for these undertakings, particularly for those with a large percentage of savings products that have financial guarantees,” its report stated.

At the start of the pandemic, market rates around the world fell to very low levels, which limited further possibilities of returns on bond portfolios. Interest rates are also expected to remain low for a longer period of time going forwar, which FI said increases the “dependence on returns from riskier assets”.

The report said that Swedish occupational pension schemes and insurers have a relatively high share of risky assets compared to providers in other countries.

“This means that the undertakings must have sufficient buffers to be able to manage the higher risks,” FI warned. It said that “significant buffers” enabled insurance undertakings and occupational pension undertakings to withstand the financial turbulence in the spring and maintain good solvency without making major changes to their investment portfolios.

“However, market rates are expected to remain low for a while, and firms continue to face the challenge of finding returns that will cover their long-term financial commitments.”

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