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Sweden announces voluntary floor on pension provider discount rate

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SWEDEN - Proposals by Sweden's financial regulator to introduce a temporary floor for the discount rate used by the country's pension funds have been rejected by AMF, one of the country largest pension providers.

At the end of last week, Finansinspektionen said that, taking account of the "considerable pressure" placed on Sweden's insurers and occupational pension funds by "historically low" government bond yields, it would introduce a floor for the discount rate based on levels at the end of May.

"The companies are given the opportunity to calculate discount rates according to the current method, but based on the closing rates as of 31 May 2012," the regulator said in a statement, saying the floor would only apply for one year.

The move comes shortly after the Danish government confirmed it was in talks to modify the discount yield curve for its pension providers amid concerns that a growing number would see their solvency ratios fall after Danish yields dropped to around 1%.

Yields on Swedish 10-year bonds have steadily fallen over the last 12 months, not rising above 3% in the past year and since September remaining almost exclusively below 2%.

Towards the end of May, yields were around 1.3%, according to data from S&P Capital IQ.

Explaining its decision, Finansinspektionen said that, without the floor, institutional investors might begin short-selling equities and shift allocations into interest-bearing assets, creating a "negative spiral of continued falling share prices and interest rates".

Commenting on the cap, the regulator's director general Martin Andersson said: "We would like to avoid short-sighted behaviour that could have consequences in the long run."

However, Tomas Flodén, chief of staff at the SEK390bn (€44bn) AMF, rejected the use of the floor for the provider, saying its solvency ratio remained high enough for it to continue with its current investment strategy.

He said the proposed floor, on which Finansinspektionen launched a consultation yesterday, was "positive" if it helped strengthen already weakened companies and ensure the safety of member savings.

"But if the proposal involves hiding problems and allows them to deepen, it is obviously problematic," he added.

"It is important to make it clear to customers whether companies show their true financial strength or if they show a picture of their financial situation based on the floor rate.

AMF's solvency ratio has remained broadly stable since the end of December, when the country's 10-year yield stood at 1.52%.

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