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Denmark: A time of adjustments

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The implementation of Solvency II into Danish law means there are now no large single regulatory issues outstanding 

Regulation in summary

• There is one remaining Solvency II executive order still to be issued – on pension providers’ quarterly reporting on sensitivities of solvency situation.
• The Ministry of Business and Growth has taken action to lower the burden of reporting under Solvency II for smaller pension funds.
• The regulator, Finanstilsynet, places more focus on pension funds’ valuations of alternative assets.

In the pensions sphere, Denmark has experienced something of a lull in regulatory activity since Solvency II was implemented into Danish law.

As part of the implementation, the Danish regulator, Finanstilsynet (FSA), issued 18 executive orders, and a further seven are expected to be issued in the remainder of 2016, as adjustments are made as a consequence of the new rules.

The regulator does still have one further executive order to issue. This relates to the requirements for pension providers to report to the FSA every quarter on the sensitivities of their solvency situation, which the regulator will use in its market surveillance instead of the traffic-light calculations it has used so far. 

The traffic-light system is no longer relevant, as Danish regulation moves from the non-risk-based capital requirement under Solvency I to the risk-based solvency capital requirement under Solvency II.

Now that Solvency II has been implemented, there are no large single regulatory issues on Finanstilsynet’s agenda.

In June, though, the Danish ministry of business and growth did act to reduce the burden of reporting under Solvency II for pension funds at the smaller end of the spectrum.

The ministry issued an executive order relating to quantitative reporting templates included in pillar three of the Solvency II Directive, the area of the EU framework focusing on disclosure and transparency requirements.

Danish retirement assets

In the decree – ‘Executive order on proportional reduction of the regular supervisory reporting for group 1 insurance companies, etc’ – insurance companies, life insurers and pension providers that have a combined market share in their respective markets of less than 20% can apply to the FSA for dispensation to reduce reporting required under the Solvency II legislation. The order came into force on 1 July.

“The traffic-light system is no longer relevant”

Finanstilsynet said it would have to look at the nature, scale and complexity of each business in question and decide whether the current reporting requirement is a burden. But it added that it expected a number of companies would find themselves with markedly lower amounts of mandatory reporting as a result of the order.

In general, the FSA is continuing to focus on alternative investments and how the schemes carry out due diligence with regard to these assets, arguably becoming more important within many pension funds’ overall asset allocation.

The regulator has focused more on the issue of valuations of alternative assets than it has in the past, and it is planning to do more work in this area.

In March, it said the three labour-market pension funds run by pensions administrator PKA had overvalued some real estate assets, and required it to re-state them in the accounts at market value.

Denmark Country facts

It said 11 of the 204 properties belonging to the pension fund for state-registered nurses and medical secretaries (Pensionskassen for Sygeplejersker og Lægesekretærer), for example, had been overvalued in the accounts. This had mainly come about as a result of the yield requirement applied, it said.

According to the FSA’s annual letter to pension funds at the end of 2015, the regulator continued to focus on product performance and the robustness of investment strategies.

It looked at how pension funds had worked to ensure they would be able to provide policyholders with the  promised returns, even under certain stress scenarios such as large equity market shocks. Within this context, the letter also contained a discussion about the general purpose of a pension, given the trend for pension providers to shift their provision increasingly towards products with no yield guarantee.

The question was raised about investment strategies behind unguaranteed pension products and whether providers made sure these were robust, even though it was policyholders rather than the companies that shouldered the investment risk.

The regulator made the point that pensions are not just about achieving the highest investment return for customers but connecting the accumulation phase to the decumulation phase. It said they should therefore consider ways of creating an income, rather than simply increasing the investment assets within the product.

The centre-right government, which took power in Denmark in mid-2015, surprised the industry by disbanding the Danish Pensions Commission set up under the Social Democrat-led government the year before.

The commission had been tasked with taking a holistic look at the pensions system to simplify the complicated rules and high taxation of pensions to make it more transparent and attractive to savers.

Although the incoming government said in 2015 that it had different objectives and set out plans for its own reform, which it said would happen by midsummer 2016, no details have been provided.

The government said its primary goal would be to reduce the number of people who had no retirement savings.

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