DENMARK - Denmark's pension schemes and life insurers suffered a 75% fall in investment returns last year, according to figures from the Danish Financial Supervisory Authority.
"Rising interest rates and big price fluctuations in equities were the main reasons why investment returns in the Danish life insurance and pension companies fell by 75% last year - from DKK55bn (€7.37bn) in 2006 to DKK14bn in 2007," Finanstilsynet said in its annual report on market developments in the life insurance and multi-employer pension scheme sector.
The average pre-tax profit in the sector fell by three percentage points from 4% to 1% in 2007, the authority said.
Finanstilsynet noted rising interest rates did give pension firms a profit in the form of lower provisions for future pension payments.
"However, the profit was not large enough to offset the low returns, and so the collective bonus potential was reduced," it added.
Under the Danish pensions system, the collective bonus potential is a pool of policyholders' undistributed profits held by the provider.
The level of bonus paid out in 2007 fell to 9% from 10.3% the year before, the authority said.
"So in comparison to the previous few years, bonus levels do remain high," it commented.
Pointing out the bonus potential cannot be seen as an indicator of the main economic distribution among customers, the authority said the bonus level should be viewed in conjunction with firms' capital coverage ratios, which fell to 9.5% from 9.8%.
"The total capital buffer to secure guaranteed payments and rights to bonuses was 18.5%," it reported. "At the outset of 2007, all companies had enough capital strength to manage both of Finanstilsynet's risk scenarios: the so-called amber and red traffic lights."
The report also looked at the interest-rate guarantees granted to customers by the firms. "The calculation shows, among other things, that around half, or 48%, of companies' provisions for pension payment are covered by interest rate guarantees of more than 4% a year.
"Interest-rate guarantees are highest among the market-orientated companies, where 55% of provisions have guaranteed interest rates of more than 4% annually," it said.