Denmark’s Financial Supervisory Authority (Finanstilsynet) wants a “broad debate” in the country over risks in the new breed of pensions that are run on a market-rate basis, effectively shifting risk to consumers.
Jesper Berg, director at Finanstilsynet, said: “The Danish pension system has undergone an enormous change in the course of just a few years, with the transition from the traditional guaranteed products to market-rate products.”
The development was being driven by the desire to give customers higher expected pension benefits, he said.
“But it has also meant that the customers themselves shoulder the risk of whether there will enough money for the years as a pensioner,” Berg said. “We need to have a broad and informed debate about it.”
The traditional average-rate pension products offered in the past – and to a lesser extent today – by Danish pension providers may or may not carry a yield guarantee. All involve an element of smoothing investment returns by effectively holding some investment returns back in good years and adding it to customers’ accounts in years when investment performance is weak or negative.
Market-rate pension products link the annual investment return directly to the performance of the underlying investments and do not carry yield guarantees, similar to defined contribution arrangements in countries such as the UK.
Finanstilsynet said it wanted to discuss whether consumer protection in the sector was adequate.
“Today, regulation and oversight of pension companies is more directed towards the traditional, guaranteed products,” the regulator said. Companies could therefore make riskier investments on behalf of customers in market-rate products.
Berg said the proportion of higher-risk investments was greater in market-rate products than it was in traditional products.
“At the same time, there is a very big difference in how the individual companies define what is low, medium or high risk,” he said.
The supervisor has published a new discussion paper on the topic which it plans to present at a conference in Copenhagen on 9 March.
It is inviting responses to the paper by 19 April.