DENMARK - Every pension customer in Denmark with a traditional retirement savings account is understood to be losing up to 15% of their savings as a result of the 'shield rate' many insurance companies have now imposed on the back of the financial crisis.
The 'shield rate', or price-protection as it is also known, means if a customer wishes to take their pension plan to another company before it is due to pay out, they will have to pay 5% to the provider because the market value of their pension savings exceed the value of their depots.
Approximatly 80% of Danish pension assets are located in traditional average interest rate plans where customers get their savings rate with the top-up rate, which has for a long time been in the vicinity of 4.5%.
If the pension company introduces a guard rate of 10% and the policyholder has a traditional pension savings with an average interest rate, they are in principle losing 10% of every penny they currently invest with their pension provider.
"It is advantageous to stop payments to the products covered today by this structure rate and cannot happen fast enough because new payments will be reduced in value from 100 to the price rate of 90 straight away, " claimed actuary and pensions expert Jørgen Svendsen.
The financial crisis and falling share prices have made it necessary for the pension companies to introduce price protection because the value of the assets does not correspond to what is attributed to customers' accounts.
Pension companies such as Topdanmark, Skandia, Danica Pension and Alm. Brand have introduced price protection, currently ranging from between 3.8% and 15%, which means the total value of the company's pension assets is between 3.8% and 15% less than what customers expect to have in their accounts.
Some pension companies are trying to paint a picture of the shield rate as only having implications for customers who move their retirement savings onto a market interest rate product or into a new company, but Svendsen suggests this is incorrect.
"Customers with a traditional pension savings in an average interest rate has lost between 3.8% and 15% of their retirement savings right now," said Svendsen.
He therefore recommends pension customers switch their pension plans to a market interest rate product unless they are planning to retire in the near future.
"In fact, it is most favourable to move the savings from a traditional savings product to a market product when shield rates are introduced, "suggested Svendsen.
Many Danes are not thought to be aware of this and the pension companies are in no hurry to tell their customers, according to Jørgen Svendsen, because it generates too much extra work for the firms if thousands of customers suddenly want to switch to a market interest rate product.
Customers with a shorter time to retirement, however, should think carefully before they move their retirement savings.
"If there are less than seven years to retirement the optimal asset mix will usually be the same as in an average interest rate product. Therefore, it does not necessarily make sense to switch to a market interest rate product, "according to Peter Lindblad, managing director of Aon Private Consulting.
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