PBU, the Danish pension fund for early childhood educators, has reduced pension payments for nearly 20,000 of its pensioners this year by between 5% and 9% in a development illustrating a negative outcome for market-rate pension holders recently referred to by the country’s financial watchdog.
The labour-market pension fund told IPE the cut had been made necessary by low market returns in 2018 as well as changes in longevity and investment yield assumptions.
While Danish labour-market pension provision has been undergoing a long-term shift towards unguaranteed market-rate pension products from traditional guaranteed average-rate pensions, there are differences between the way providers calculate pensions in payment.
PBU’s mathematical director Frank Cederbye said payments to pensioners from the scheme in 2020 are between 5% and 9% less than in 2019, depending on the risk profile according to the age of the individual.
He told IPE: “We have chosen to have a plain vanilla pension product – what you see is what you get. It has no buffers and no implicit guarantees and introduces a bit more risk, but this handled through the investment profiles.”
Under its market-rate pension product – which now covers nearly all of the pension fund’s members – PBU re-calculates payments each year with a one-year delay.
This means pensions paid out in 2020 are based on 2018 investment returns, life expectancy and common assumptions for Danish pension funds on future investment yields, Cederbye said.
“These assumptions were lowered in 2018, and life expectancy increased, and on top of that investment returns were poor in that year, so we had three negative effects,” he said.
PBU made the calculation for 2020 pensions in 2019, and sent out letters informing the near 20,000 pensioners affected in June, he said.
“We had no reactions from them in June, but around the end of last year we did have some reactions – mainly questions about the reduction because investment yields had been very good in 2019. But of course, the payments are calculated based on the 2018 data,” Cederbye said.
Last week, the Danish FSA published a report on the “privatisation” of risk in unguaranteed market-rate products, and how pension companies were informing their customers about this.
It concluded providers of market-rate pensions had not been giving customers adequate information about the risks they are exposed to, both in the accumulation and payout phases of the products.
Cederbye said PBU’s product did have the advantage of being easier to explain to customers.
“In our view, information is much easier to get across when you have a plain vanilla product. We have a very mechanical way of setting the pension level – we stick to our model, make the calculations and then these adjustments,” he said.
The pension fund is currently in the process of calculating 2021 pension payments.
“One element is we had very high investment returns in 2019, but on the other hand we have expectations of lower bond yields, so we are in the process of finding out what the net effect will be,” he said.