DENMARK - Danish regulators are acting to rule out intergenerational subsidy within guaranteed pension contracts with new rules on with-profits arrangements, and pension providers will now have to set guarantees and investment strategies for different generational groups.

Under the new regulations on with-profits pension arrangements  - kontributionsbekendtgørelsen - which will apply to both pension funds and commercial contracts in Denmark, the risk, investment and cost result will be ring-fenced within different groups, which share a return guarantee, risk profile and cost level.

The regulations, which have been in the pipeline for several years and take effect in January 2011, will make it illegal for pension companies to share the collective bonus potential evenly across all customer accounts.

Jan Parner, deputy director general of the Danish Financial Services Authority, Finanstilsynet, told IPE: "It's going to be interesting to see what the sector will do, particularly in this environment of lower interest rates."

Contrary to general practice in the Netherlands, the Danish pension system does not have much intergenerational smoothing, Parner continued: "There is a common perception that one group shouldn't be subsidising another. Under the new regulations, you can only share risk and investment with those that are similar to you. It's new that we are being explicit about this."

The regulation is a response to a general failure by the pensions industry to live up to this "fairness" expected of them, Parner added.

"We saw a lot of different behaviour within companies, and we could not come up with a common market discipline. Some had a very different interpretation of current legislation, and so now we are making sure they share they share the profit as they should."

He said transparency has been a problem, and in some cases it was not clear how a pension company was splitting the bonus potential.

"The structure has to be same so we know what's going on," said Parner.

Pension providers now have the task of establishing the different groups within the sum of total contributions, setting return guarantees for each and investment strategies suitable for each guarantee.

Higher return guarantees will necessitate more cautious investment while lower guarantees will allow greater investment risk. Parner said lower guarantees may lead to higher returns, with the impication that client communication will be paramount.