Alecta, Sweden’s largest occupational pension fund, has announced it is lowering the cost of the lump-sum defined-benefit (DB) pension contracts, as another consequence of rising market interest rates.

The SEK1.12trn (€102bn) occupational pension fund said “Alecta’s board has decided to lower employers’ one-off premiums when redeeming a defined benefit retirement pension”, adding that the measure - which cut an average of 7% off the cost of bulk annuity purchases - was a consequence of rising market interest rates in 2022.

A month ago, Alecta said pension payments from its own DB scheme would rise by nearly 11% next year because of soaring inflation, and said that rising market interest rates had been one of the factors behind a 40% reduction in DB premiums paid in 2023 by its corporate customers.

The latest decision means that Alecta’s premium rate for one-off premiums will be raised to 1.2% from 0.50%, the firm said, while it said the deduction for return tax was being increased from to 0.45% from 0.2%.

“All in all, the changes mean that the net interest rate, i.e. the premium interest after deductions for return tax and operating costs, is increased from 0.2% to 0.65%,” the Stockholm-based pension provider said on Friday.

“For an average PRI redemption, the measure means that the premium is reduced by approximately 7%,” Alecta said.

A PRI redemption is where an employer financing staff pensions under the ITP2 scheme via balance sheet provisions or a pension foundation, exchanges all or part of their pension liability for an insurance contract.

The one-off premium, including Alecta’s future returns, has to cover all future pension payments.

Fredrik Palm, product manager at Alecta, said: “Rising market interest rates mean that the employers who choose to redeem the PRI debt are contributing an increasingly large amount of consolidation capital.

“It is important that the pricing is based on current market conditions, and therefore we are now lowering the premiums for PRI redemptions,” he said.

Alecta said the decision covered both voluntary and mandatory redemption, and was effective from January 1, 2023.

Rising inflation, the main driver behind higher interest rates, is affecting DB provision in many different ways, for example by weighing on stockmarket returns as well as - via the higher interest rates it triggers - reducing the book value of pension liabilities. But lobby group Insurance Sweden recently warned that persistent high inflation would push up the cost of DB provision.


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