Danish pensions avoid 'red' traffic light
DENMARK - Finanstilsynet, the Danish Financial Supervisory Authority, has confirmed no life insurance companies and pension funds has triggered the 'red light' in its traffic light warning system.
A report for Finanstilsynet noted at the end of October the turmoil in the financial markets had negatively impacted the companies' buffer funds, but said the status of the funds was "unchanged" at the end of the month.
The Danish FSA had requested life insurance companies and pension funds file further "extraordinary reporting" relating to its solvency and buffer levels for traffic light reporting, following continued turbulence in the markets, even though in September 2008 all but three of the funds received a 'green light'. (See earlier IPE article: Traffic lights shine green for all but three pensions)
"All the companies were at the end of October robust enough to meet the pension benefits they have guaranteed customers," said Jan Parner, vice president of Finanstilsynet.
That said, Parner admitted "all companies" have had to use the collective buffers, and "several companies" have also taken the opportunity to borrow from the customers' individual buffers, though added for the pension sector as a whole "there are still significant buffers" in the form of individual bonus potential - as a number of Danish pension schemes have moved away from guaranteed returns to bonuses payable on performance.
The extra report submitted at the end of October was requested by the FSA to ensure ongoing monitoring during the financial crisis, and was designed to explain the life insurance and pension funds use of client funds, as they can use buffers that have been built up to cover losses.
This information is not normally included in the traffic light reports, which tend to focus only on the solvency of the fund before and after the 'red' and 'amber' stress test scenarios.
To pass the red light test, the fund must withstand a 12% drop in equities and 0.7% drop in interest rates while to pass the amber test solvency levels must be able to cope with a 30% drop in equities and a 1% drop in interest rates.
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