The Danish FSA has announced it is reducing to -0.5% from 1% the maximum basic interest rate that the country’s pension providers can guarantee their customers, a change an industry group said will give providers more investment freedom.
The watchdog announced yesterday: “The Danish Financial Supervisory Authority has today issued an executive order which, from 1 July 2021, reduces the maximum basic interest rate from 1% to -0.5%.”
The reduction was due to the low and negative interest-rate level, the FSA said.
The maximum basic interest rate (grundlagsrente) is the highest interest rate that pension companies may use when offering traditional guaranteed average-rate products.
In an average-rate product, the watchdog said, customers were also entitled to a bonus, which arose from profits if investments performed better than the “carefully-set” assumptions.
The maximum basic interest rate applies to new pension contracts, contribution increases and bonuses, the FSA said.
“For existing average interest-rate products with agreed contributions, the guaranteed minimum benefits are to be maintained, even if they are calculated at a basic interest rate that is higher than -0.5%,” it said.
Industry association Insurance & Pension Denmark (IPD) responded to the rate cut, saying: “It is the price of security, and it gives pension companies the freedom to pursue investment strategies with restrained risk.”
Kent Damsgaard, chief executive officer of the lobby group, said: “At first glance, it doesn’t sound attractive to have a guarantee of minus 0.5%. However, this may be the case anyway for some types of customers in light of the negative interest rates on ‘safe’ securities such as government and mortgage bonds.
“A guarantee of minus 0.5% gives the pension company the freedom to pursue an investment strategy with controlled risk – and of course an expectation and hope for a higher return than the guaranteed one,” Damsgaard said.
IPD said the coronavirus crisis and a very expansionary monetary policy seemed the explanation for negative interest rates on government and mortgage bonds.
Although non-guaranteed pension products were gaining ground among Danish pension customers, some still preferred a guaranteed scheme, the association said.
Pension savings with a guarantee now make up almost half of Denmark’s total pension savings and approximately 30% of contributions, according to IPD.