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Danish pension interest could fall to 4%

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DENMARK - Forsikring & Pension, the Danish Insurance Association, has warned pension customers are likely to see interest on their accounts fall below the base rate to at maximum of 4.5% in 2009.

The organisation said the financial crisis had led to great losses for investors around the world, but admitted it had also impacted Danish pension funds so "cannot help but affect the rate of pension" as a result, though it stressed customers will continue to receive the pension they have been promised.

Forsikring & Pension said while customers who placed retirement savings in bank securities or purchased interest rate tracking products without a pensions guarantee, those with traditional pension plans have seen their pensions remain unchanged as pension companies' reserves, which have been built up over recent years during the positive financial markets, have shielded the customers and kept their pensions intact.

It added, however, the crisis will still have consequences as the pension companies are currently considering the account interest for next year, warning: "It is expected that the crisis will be reflected in a significantly lower rate. Generally, we do not expect there will be money to increase pension guarantees."

The organisation suggested there is "strong evidence" the offered rate will reach a level lower than the base rate for many pension plans, even though some older systems may be based on a base rate of up to 4.5%.

Although the interest paid to the accounts could be reduced, Forsikring & Pension pointed out ension plans with guaranteed benefit pension companies - which are guaranteed a pension of a certain size - take into account a number of assumptions, including interest rates, but the guarantee is on the total pension amount so even if the interest rate is lower the pension company would still meet its obligations.

The firm saisd there are a number of reasons why pension companies might reduce the interest rates on the plans, such as the stability agreement with the government, concluded by Forsikring & Pension in October, which included companies' placing a cap on interest rates to help market stability, while holding back account interest rates would also help rebuild reserves faster. (See earlier IPE article: Denmark agrees pensions solvency rescue package)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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