DENMARK - PFA Pension is changing the benefit guarantees on new pension plans in a move that it says will give more leeway with investment policy.

Benefit guarantees on new policies set up after 2 April this year will be changed. On new pension policies, the guarantee will only apply to contributions as they are paid in - and not to future expected contributions.

Up to now, when a new policy was written, PFA Pension promised to give a benefit guarantee equivalent to an average rate of return of 2% - and higher than this on some older policies.

PFA Pension manages DK235bn (€31.5bn) in pensions assets. It is a commercial pension provider, but also customer-owned.

In a statement, it said: "When we calculate the pension benefit payments customers can expect, we also take into account their expected contributions.

"Now, a part of that amount will be unguaranteed. But the closer one gets to receiving the pension, the bigger the guaranteed part will become, as we will give a guarantee when money is paid in."

In addition to changing how the guarantees work, PFA Pension also lowered the basic yield rate - the rate on which the benefit guarantee is calculated.

This change was dictated by a requirement from the Danish Financial Services Authority (Finanstilsynet), which had lowered the maximum basic yield rate for pension funds to 1% from 2%, it said.

Accordingly, PFA Pension has halved its basic yield rate to 1% from 2%. From 2 April, all new traditional with-profits policies will be set up with a basic yield of 1%, it said.

On existing policies, any contribution increases would be subject to the new 1% rate as well, though this would happen at the later date of 1 July, for policies with a basic yield rate of 2%, PFA Pension said.

The same change would apply to policies with a basic yield rate of 3% and/or 5% from 1 January 2012. However, the changed benefit guarantee conditions that will apply to new policies will not apply to existing policies.

The pension fund stressed that the changes to guarantees did not necessarily mean actual pension benefits would be lower.

"Lower guarantees give a greater degree of freedom for PFA's investment policy," it said. "And the greater degree of freedom for investment policy, the greater the chances for higher returns, which can be passed on to customers."

PFA Pension says it has no problem meeting the Solvency II requirements. But some Danish pension funds are struggling with their commitment to the benefit guarantees given as part of the traditional with-profits pension plans.

These pledges mean that, under Solvency II - which is set to be implemented in Denmark in 2013 - the funds will need much higher levels of reserves and therefore be limited in the amount of investment risk they can take.

In March, six Danish life insurers and pension institutions were recently shown to have failed the QIS 5 stress test for Solvency II. 

The Danish FSA said at the time that one of the options open to them was to undertake ballots with a view to reducing guarantees.

Last May, labour market pension fund Sampension sparked controversy by withdrawing benefit guarantees on all pensions.

The move had been agreed with the collective bargaining parties and was subsequently endorsed by the Danish FSA.

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