Norway’s Ministry of Finance announced today it is not going ahead with a proposal to stop pension providers from being able to account for investments in customer funds in bonds and other loans at so-called amortised cost – a plan which would have forced them to use market valuations instead.
The proposal, which has been out for consultation since January as part of an inquiry into the regulations for guaranteed pension products, had come from the Norwegian FSA (Finanstilsynet) which argued that the change to ongoing market valuation would support “neutral transfer rules” and simplification.
But opponents argued – among other things – that banning amortised cost accounting for the underlying fixed income investments would mean more risk for the providers and as a result of that, ultimately lower returns for pension savers.
Stefi Kierulf Prytz, director of life and pensions at lobby group Finance Norway, said: “It is an important victory for pension savers.”
She said the industry association had been working on the matter for a long time, and was pleased the ministry had listened to its arguments.
“Managing guaranteed pension products in a low interest rate regime is very challenging, where the providers are forced to take very low risk. This proposal would make it even more difficult for customers to achieve a satisfactory return,” Kierulf Prytz said.
A significant portion of bond investments and loans in the customer portfolios underlying guaranteed pension products in Norway, such as defined benefit plans and paid-up policies, are accounted for at amortised cost, the ministry said.
Were investments valued according to the market instead, changes in market rates could lead to increased profits or deficits on customer assets because of changes in the value of the bonds, it said.
“The access to amortised cost use for a significant proportion of investments in pension funds gives pension providers a buffer against changes in market rates,” the ministry added.
In the consultation, the government department said it had asked stakeholders to comment on this proposal specifically, stressing that no change was not appropriate unless it could be adequately shown to be in the customer’s favour.
“The hearing responses have different views, but a majority of replies do not support the proposal from the FSA,” the ministry stated.
Those against the idea said it would weaken suppliers ‘ability to manage risk and so could reduce customers’ returns, it said.
“It has also been pointed out that it may be unfortunate to make such a change in a situation with a great deal of uncertainty in the financial markets,” the ministry added.
The ministry said it was still considering the other regulatory proposals contained in the consultation, whose deadline was 8 April.