DENMARK - The financial head of a leading Danish pensions provider has warned that the cost of hedging against liability risk is forcing it to consider ways of re-negotiating the guaranteed returns it promises.
Hasse Jørgensen, chief financial officer of SAM Pension, a provider of guaranteed annuities, blamed the rush into derivatives by pension funds following the introduction of the regulatory requirement in 2001 to mark liabilities to market.
Speaking at the IFM 2007 conference in Geneva today, he said: "There has been an enormous amount of hedging on the Danish market and we have all bought an enormous amount of derivatives."
Jørgensen warned that pension funds would be locked in if interest rates rose. "As I see it, the likelihood of interest rates going up is higher than the other way round. So there is a likelihood that we will lose a lot of money on derivatives."
He said that the real problem was the guaranteed rate of return of 4.5% rather than the change in accounting rules. "The way I see it is the only way out of this is actually working with the liabilities as they apply to pension funds, and there are many different approaches and there are opportunities to do something about our liabilities.  
"I would like to move as fast as I can on this. "

Jørgensen would not reveal details of any possible re-negotiation. However, it is likely to be along the lines of an approach used by some smaller Danish pension funds, which have reduced the guarantee substantially on the understanding that the freer use of reserves would produce an equivalent or higher rate of return.