The risk that defined contribution pensions will result in a low pension for savers is “very small”, according to the Danish industry association for the pensions and insurance sector, Forsikring & Pension (F&P).
F&P was responding to a regulatory investigation by the Danish Financial Supervisory Authority (FSA or Finanstilsynet).
It presented a discussion paper at the beginning of March on the risks for consumers in “market-rate” pensions, whose returns are directly linked to underlying investments. Providers are increasingly offering savers these products instead of the traditional “average-rate” pensions with or without yield guarantees.
In its response document – entitled “Good pensions with controlled risk” – F&P said: “It is important to make clear that even though the investment risk is greater in non-guaranteed products, the risk that the individual client will end up getting a low pension is only very small.”
The association cited three reasons for this: First, it said pension providers limited investment risks by investing in many different asset types and individual assets. Second, pensions were a very long-term form of savings and downturns on financial markets were typically soon followed by upturns. Thirdly, it said pension providers usually reduced investment risk for customers the closer they came to pensionable age.
Finanstilsynet said last month that the Danish pension system had undergone an huge change in the last few years with the transition from the traditional guaranteed products to market-rate products.
It said the development was driven by the desire to give customers higher expected pensions, but also meant that the savers themselves shouldered the risk of whether there would be enough money for their years as a pensioner.
Per Bremer Rasmussen, chief executive of F&P, said the association welcomed a businesslike debate on the subject raised by regulator.
“It is important that the pensions industry, regulatory authorities, and Danish politicians continuously take positions on whether the Danish pensions system has the best conditions for providing Danes with the best possible pensions,” he said.
But F&P said information currently available to customers with non-guaranteed pension products was not adequate, and this was why the industry was in the process of new initiatives on information.
The association presented a four-point plan last month to promote consumer protection regarding pensions.
“There is a lot of literature showing that the typical consumer finds it very difficult partly to understand risk, and partly to act in regard to managing that risk,” the association said in its response to the regulator’s specific questions. “So it is important to take as a starting point the consumer’s limited understanding and interest, when communicating on risk.”
It was also important to give the individual pensions firm enough freedom to target and test the information for its specific customer segment, F&P said.