Danish pensions solvency package could be extended
DENMARK - The pensions solvency rescue package agreed last autumn between the Ministry of Economic and Business Affairs and the Danish Insurance Association could now be extended beyond the end of this year, and the two parties are now in talks.
"We are currently discussing a possible extension," confirmed a spokeswoman for the ministry.
Widespread forecasts suggesting there will be a second slump in the financial markets have worried the pensions sector as to how this might hit solvency levels.
The agreement signed on October 31, 2008 included several new measures designed, the government said, to help safeguard pension savers against unnecessary losses as a result of the financial crisis.
Abnormal market conditions had put insurance and pensions companies in a situation where they could be forced to divest Danish mortgage bonds, even though this would have serious consequences for both savers and homeowners, it said.
The measures at the time included the temporary adjustment of the maturity-dependent interest rate term structure (yield curve), stronger consolidation terms by putting an upper limit on bonuses, adjustments for mortgage bond portfolios when calculating individual solvency requirements, and greater weight put on solvency requirements rather than ‘traffic light' scenarios.
Carsten Andersen, deputy director of the Danish Insurance Assocation (Forsikring & Pension), said it was now important that the package was extended.
"What is important is the yield curve," he said. "We have a yield curve expressed in euro swap interest rates and this was adjusted by the package. At the moment, things are OK, but if we have pressure on the Danish currency again then we will have a situation where the euro is not an appropriate proxy for Danish interest rates."
Jørgen Svendsen, a Danish independent actuary and pensions expert, said he expected the pensions package to be renewed.
"I expect to see that, because everyone is afraid that we will see a new crash in the market," said Svendsen. " If it comes, it will be very helpful for the companies if they can rely on this package," he told IPE.
A double-dip slump would cause problems for pensions providers as some of the DC plans are still underfunded and this has frozen the transfer market, Svendsen explained. Many people are now having to wait to transfer plans when they change jobs, because the underfunded provider is not able to release the funds without making a deduction.
The rescue package agreed last allowed pension supply companies used a special long-term interest rate, which in turn reduced the liabilities, coupled with a reduction in the bonus interest to clients.
"But it is also up to the pension supply companies to be prudent and not promise interest rates to clients that are too high," said Svendsen, who claimed sharp competition in the market had recently triggered unreasonably high payouts.
The pensions package mostly affects market life insurance pension firms such as Danica, Topdanmark, PFA, AP, SEB, Nordea and Skandia, although its impact could also felt by non-life market insurance players such as PensionDanmark.
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