Denmark: A change of direction
Preparing for the introduction of Solvency II in 2016 and proposals expected to broaden pension participation are top priorities for the new government
Regulation in summary
• Parliament approved the Solvency II national legislation as part of the Danish Financial Business Act.
• The Danish financial regulator has issued rafts of executive orders ahead of final implementation of Solvency II in January 2016.
• An executive order to clarify the ban on intergenerational transfers within pension funds is imminent.
• The Pensions Commission was disbanded as the incoming government focused on narrower reform.
• The Danish central bank has required pensions institutions to report currency positions weekly following speculative pressure on the krone in markets.
In Denmark regulators and legislators have been working tirelessly on implementing the Solvency II Directive. This work, which affects pension and insurance companies, has been the pensions industry’s main focus this year.
The Danish parliament, the Folketinget, passed the implementation of Solvency II as part of the Danish Financial Business Act in March.
Since then, the country’s financial regulator (Finanstilsynet) has issued seven executive orders implementing Solvency II, and there are an additional six orders out for public consultation.
With the end now in sight, the regulator is preparing a further five executive orders which will complete the full implementation of the legislation before the new regime becomes law on 1 January 2016.
Finanstilsynet says the pensions and insurance industry association Forsikring & Pension (F&P) is being regularly consulted throughout implementation.
Finanstilsynet is also updating its executive order on the contribution principle, which constitutes a crucial part of the Danish fairness regulation (bekendtgørelse om kontributionsprincippet). The aim of the update is to make the ban on intergenerational transfers within pension funds explicit.
The regulator says it has been monitoring the risk of intergenerational transfers since 2012 when the ultimate forward rate was implemented in the Danish discount curve used to calculate pensions liabilities.
In a letter sent to institutions in 2014, Finanstilsynet focused on the prudent person principle within Solvency II, which replaces current investment rules. The principle requires the company to properly identify, measure, monitor, manage, control and report the risks associated with a particular investment.
It also pointed out that the principle had more of a top-down approach than the previous practice, and was concerned with whether the investment strategy of the company could fulfil the promises given to policyholders. The regulator divided the top-down approach into three themes: sound and prudent, all-weather gear, and on-track.
While sound and prudent is primarily about delivering the cash flow to fulfil the insurance policy, all-weather gear focuses on the institution’s ability to cope with potential future financial and economic environments. For example, the Japanese interest-rate scenario, rising interest rates or inflation, change of inflation level, low return on equities and higher return on bonds – and the reverse scenario. On-track concerns relating short-term investment results to long-term objectives.
Finanstilsynet says its letter is aimed at making sure companies are prepared to cope with the new legislation when Solvency II comes into force next year.
The Danish Pensions Commission, established under the Social Democrat-led government in 2014, was unexpectedly disbanded by the incoming centre-right government in July 2015. The commission was given the task of taking a holistic look at the pensions system to streamline the complex rules and high taxation of pensions, to make it more transparent and attractive to savers.
But the new government says it had different objectives. It has set out plans for its own reform, which would take place in of 2016. Its main aim will be to reduce the number of people who have no retirement savings.
F&P initially branded the statements made by the new government on pensions as positive, but expressed surprise at the decision to shut down the Danish Pensions Commission.
The government had not prioritised analysing the problems of the interplay between public benefits and private pensions, the association said. It added that for many people these problems meant that it did not really pay to save for a pension in the last few years of their working life.
In February 2015, following waves of currency speculation on financial markets that put upwards pressure on the krone, the Danish central bank introduced a new requirement for pension funds to report their currency positions weekly.
The currency came under pressure following the decision by the Swiss central bank to allow the franc to float against the euro, abandoning its peg to the pan-European currency.
Many market participants subsequently believed the Danish currency would follow the franc’s example and abandon its peg, even though the central bank vowed to continue defending it.