Pension funds must resign themselves to promising less, says Denmark's ATP
EUROPE - Pension funds in Denmark and elsewhere will have to cut the level of pensions they promise scheme members in future in order to cope with the dual problem of low interest rates and rising longevity, warns the head of Denmark's largest pension fund.
Record low yields on long-dated Danish sovereign debt have recently caused problems for some pension funds with guaranteed pension liabilities.
The lower bond yields increase the level of reserves the companies are obliged to hold.
Lars Rohde, chief executive at ATP, told IPE: "In broad terms, we haven't seen interest rates as low at any time, so of course it's a problem for the pensions industry.
"There are difficulties for the industry worldwide, and this is one of the two main challenges - one is rising longevity, and the second is the low interest rates.
"They are both in the same direction, meaning we need to have high returns to cope with both factors, given the promises that have already been given."
He said there was only one way to do this, and that was to reduce costs and enhance returns, both of which were very difficult to achieve in the current environment.
"So we have to promise less," he concluded.
The Danish government last week agreed to alter the discount yield curve to help pension funds cope with the fall in bond yields.
The long end of the new curve - which is used to calculate how much pension funds must set aside to cover future liabilities - will be linked to economic expectations rather than bond and swap rates.
Rohde said some Danish pension companies were feeling the pressure more than others, depending on their business model.
But he refused to be drawn on whether current difficulties meant Danish pension funds would have to withdraw the yield guarantees they had already made.
"I can say for ourselves that we have totally hedged our interest-rate exposure so we are in good shape," he said.
Under ATP's pensions model, future pensions are guaranteed based on the rate ATP is able to obtain in the market at the time the contributions are paid.
This contrasts with the fixed guaranteed yield offered by many Danish pension schemes in the past as part of their traditional with-profits plans.
However, Rohde said this did not mean ATP could ignore the current market situation.
"You have to be more humble about what you can promise people in the future," he said, adding that this applied to ATP as well.
It was impossible to predict how long interest rates would stay at current low levels, he said.
"If one of us had been asked 10 or 20 years ago if the interest rate could go as low as 1% or 2%, we would have thought this insane," he said.
"History tells us to be very cautious regarding forecasts of interest rates. We know from Japan that interest rates can be very low for a very long time. We also know we have a huge monetary stimulus around the world.
"The prudent thing now is to be prepared for high inflation and high interest rates and low inflation and low interest rates."