In Denmark’s parliamentary debate on a reform of ATP – the DKK990bn (€133bn) statutory scheme which provides a key first-pillar pensions layer – the country’s financial watchdog has been revealed to have several serious doubts about the plan, given the information it has so far.
In an internal document sent to the Ministry of Employment, Denmark’s financial watchdog has outlined a series of misgivings it has about the proposed change to ATP’s hedging strategy, which will allow it to slash the value of liabilities.
The plan – just part of the reform to the ATP Act currently before parliament – involves adding an illiquidity premium to the discount yield curve the pension fund uses to calculate the value of the pension guarantees it has made.
This, along with other elements of the proposed shift in ATP’s business model, is aimed at boosting the pension scheme’s potential for returns, which are under pressure because of low and negative interest rates and the nature of its pension guarantees.
The FSA (Finanstilsynet) said that so far, it had only assessed the proposed change to the hedging strategy in a form which did not allow it to decide whether it could be implemented in practice.
“Therefore, on the current basis, the Danish FSA has several reservations in relation to the proposed adjustment in relation to the hedging strategy,” it said.
“Secondly, the introduction of the illiquidity spread entails a new statement of ATP’s provisions,” it said, adding that it was not clear how the introduction of the new calculation method affected its supervisory obligation to ensure the provisions were adequate.
“Thirdly, it is unclear whether a meaningful and sufficiently well-defined prudential obligation can be created in relation to the use of an illiquidity spread in the yield curve used for the calculation of ATP’s provisions,” the FSA wrote.
The 11-page document, dated 19 February, was made public on 14 April, as part of an answer by Employment Minister Peter Hummelgaard to a parliamentary question on why the legislative proposal limited the FSA’s future role regarding ATP.
The FSA’s response to the consultation was not included in the main body of responses published along with the bill on 24 March.
In its internal consultation response, the FSA said it did not know of other comparable examples or practices where illiquidity spreads were added to interest-rate curves that were used to calculate provisions, and also said an illiquidity spread could not be discerned in the market.
“Overall, the Danish FSA finds that the bill introduces significantly increased complexity in ATP’s product and its management, as there is not a sharp division as there is today between the hedging portfolio, which is used to hedge the guarantees and which today does not take risk, and the bonus potential, which assumes risk,” the FSA said.
All in all, it said, change in the bill entailed an increased risk of losing the pension fund’s buffer, thereby transferring risk to the bonus potential.
“Ultimately, there is a risk that ATP will not be able to fully honour the members’ guaranteed pension rights,” it said, adding: “The Danish FSA does not have full insight into the magnitude of this risk.”
The Ministry of Employment has said, as part of the debate, that the FSA will focus – in its future work of adjusting the accounting rules – on whether the necessary clarity can be achieved regarding the framework for the use of an illiquidity spread, as well as over its supervisory obligation in relation to the adequacy of provisions.
“The Danish FSA still has a supervisory obligation in relation to the fact that the risk measure to be used must support adequate identification, measurement, monitoring, management, control and reporting of the risks that the adjustments entail,” the ministry said in a document commenting on the FSA’s internal consultation response.
In the political debate about the ATP reform so far, one of the main points of contention in the proposed legislation has been the idea of changing the rules so that in certain circumstances, the ATP board can decide to award the annual bonus solely to pensioners’ accounts, and not to those of younger Danes.
The third and final hearing on the ATP bill in Denmark’s parliament is set for 18 May, and under the current plan, the legislation should take effect on 1 July.
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