DENMARK - Danica Pension, the DKK 241bn (€32.36bn) pension arm of Danske Bank, has announced it will pay a net interest rate of just 1.5% for all customers with Danica Traditional pension plans.

That said, the company confirmed although the interest rate will be fixed at 1.5%, after taxes, in 2009 - followed by regular assessments - it would continue to pay the guaranteed level of pension that customers have been given.

Danica Pension noted for customers with a pension plan established before 1 July 1994 benefits are calculated on a base rate of 4.5%, while for pensions started between July 1994 and 1 January 1999 the base rate is 2.5%.

But the company said it can set an annual interest rate lower than the base rate for a few years, as long as the total pension payment corresponds to the guarantee given to the customers.

Henrik Ramlau-Hansen, chief executive of Danica Pension, said the "considerable uncertainty" in the current financial markets, with the risk of further losses, means it is "not the time for high interest accounts".

He added once the financial crisis is over there will probably be a long period of low interest rates as a result of "subdued economic development".

"With an account interest rate of 1.5% after taxes in 2009, we want to follow the government's call for caution, as it may be needed to build customers reserves to an appropriate level," added Ramlau-Hansen.

Danica Pension said historically it has set account interest rates above base rates, with an average of 4.75% after taxes in the last 10 years, and an average of 5.43% over 20 years.

However, the interim results from Danica Pension earlier this year revealed account interest rates of 5.5% on savings after tax, combined with a low investment return, caused the collective bonus potential of the scheme to fall DKK5.8bn to DKK7.6bn. 

It added a further fall in equity prices of 29% would reduce the collective bonus potential - the funds used to pay bonuses to members - to zero, while an increase to the interest rate of one percentage point would cut the collective bonus potential by DKK4.2bn.

Danica's announcement follows a warning yesterday from Forsikring & Pension, the Danish Insurance Association, that the current market turmoil could lead to insurers reducing interest rates below the base rate levels. (See earlier IPE article: Danish pension interest could fall to 4%)

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