Despite suffering major investment losses at the beginning of the COVID-19 crisis, pension funds in Denmark are now well-capitalised enough to handle serious price falls in both equities and bonds, according to the financial regulator.
In its latest risk report, the Danish Financial Supervisory Authority (Finanstilsynet) said pension companies and their customers had been hit by major share price losses at the beginning of the pandemic, denting solvency levels for providers with guaranteed products – as well hitting the value of customer savings in non-guaranteed products.
“However, on the basis of current statements, the pension companies are generally considered well-capitalised and can withstand even large price declines on their equity portfolios and their bond portfolios,” the FSA said.
The Danish economy, like that of the rest of the world, was severely affected by the COVID-19 outbreak, the FSA said, but said both credit institutions and insurance and pension companies had entered the crisis with sound capital bases.
But the watchdog warned about falling property prices and flagged up a new monitoring exercise it would conduct in this regard.
Property prices in Denmark had been rising for several years as a result of the general economic growth and the marked fall in interest rates, it said.
“However, as a result of COVID-19 crisis, there is now a prospect of general but likely limited price declines in the real estate market, with significant downside risks – because a deep and long-lasting recession can lead to significant falls in property prices,” it said.
Given the large market fluctuations during the pandemic crisis, the authority said it would carry out a survey this year of pension firms’ property portfolio valuations.
The FSA has announced a broader investigation into the pension sector’s ongoing valuation of all alternative investments.
In the risk report, the FSA also said there was increased uncertainty about the consequences of rising European debt levels to alleviate the effects of the crisis – and that this in turn ramped up uncertainty over the direction interest rates would take in the next few years.
Overall, however, the FSA said the assessment was that interest rates were very likely to remain very low for a long period.
“The low level of interest rates affects pension companies and their customers through several channels,” it said, citing the difficulty it presented for firms’ in honouring high guarantees on average interest-rate products – and the switching to market-rate products which had consequently been offered by many providers.
“The Danish Financial Supervisory Authority will continue to focus on consumer protection in market-rate products, including in relation to the characteristics of products, risk management in a low interest rate environment, and communication with customers, based on a thematic study on market-rate products,” the agency said.
In January, the agency criticised pension providers for failing to give customers adequate information about the risks they are exposed to with market-rate pensions.