Denmark extends pensions solvency deal
DENMARK - The Danish Government has extended for another year the pensions rescue package it put in place a year ago to protect pension savers in the wake of the recent financial crisis.
Denmark's ministry of economic and business affairs said in a statement that the ministry and F&P, the Danish Insurance Association, had now agreed to extend the arrangement until the end of 2010.
There are also ongoing talks which could see Danish regulation adjusted to fit the new Solvency II rules on pensions, including a longer-term change to the rules concerning the future yield curve.
"The need for the agreement came about because abnormal market conditions brought the insurance and pensions companies to a situation where they could have been forced to sell Danish mortgage bonds unnecessarily," said the ministry.
"A major sell-off of mortgage bonds could have created serious consequences for pension savers and property owners in the form of falling prices and rising interest rates," it continued.
The markets have now normalised to a certain extent, it said, but there was still a risk of further abnormal market conditions.
"Therefore, the extension of the agreement includes the clause that mortgage bond rates will continue to be included in the yield curve used by pension companies to calculate their liabilities," said officials in the statement.
Some experts in the pensions industry said they had been worried about how solvency levels would be hit if the widely-forecast second slump in the financial markets came about.
The original agreement took effect on 31 October 2008 and was due to expire at the end of 2009. Measures in the original agreement included the temporary adjustment of the maturity-dependent interest rate term structure (yield curve), stronger consolidation 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. (See earlier IPE story: Denmark agrees pensions solvency rescue package)
It was the yield curve part of the package that was seen as particularly important by pension providers. Prior to the agreement, Danish firms had to use a yield curve expressed in euro swap interest rates, but this became problematic when there was pressure on the Danish currency. Under the rescue package agreement, firms could then use Danish interest rates instead.