The Danish pensions sector experienced a relatively quiet 2013-14 regarding regulatory change, after previous years when changes to the discount yield curve demanded attention and ahead of the final implementation of Solvency II legislation.
In the summer of 2013, the financial regulator Finanstilsynet — the Danish FSA — held talks with the industry association Forsikring & Pension (F&P) to establish a standard method-ology for solvency requirements for insurance and pension companies. In Denmark, the vast majority of pension schemes are incorporated as life insurance companies.
Following those discussions, the FSA laid out new solvency rules aimed at providing an equal level of policyholder protection — in a statement on the solvency and business plans of insurance companies, published on in November 2013, within the framework of the Financial Businesses Act (Lov om finansiel virksomhed).
The FSA had been concerned that pension providers were using several different methods for calculating their individual solvency requirements, which it said led to uneven levels of policyholder protection.
The new capital requirement is based on the Solvency II standard model, and took effect for life insurers, including pension providers, on 1 January 2014. The capital requirement is supplemented by the regulation on Own Risk and Solvency Assessment (ORSA).
This year the Danish FSA is implementing the second part of its equal level of policyholder protection rules, covering regulation on the calculation of base capital — the assets that can be used to cover the capital requirement. It also includes regulations on new accounting standards and governance, where the FSA is now working to introduce the four functions: risk management, actuarial, compliance and internal audit.
Regulation in summary
• The Danish FSA has moved to bring solvency regime into line with Solvency II ahead of the 2016 final implementation date.
• The individual solvency requirement has been standardised to ensure an “equal level of poilicyholder protection”.
• Regulation on transfer values has been firmed-up as pension savers switch out of guaranteed pension products.
• Concerns remain over the shift to advance taxation for kapitalpension, with some providers linking this change to the switch away from guarantees.
All the legal changes will be in the direction of Solvency II and will come into force on 1 January 2015 at the latest, the FSA says.
Many of the elements of the Solvency II regime are now in place in Danish regulation for insurance companies and pension providers, ahead of the final implementation date of 1 January 2016.
Rules concerning the use of internal models will apply from April 2015, giving Danish pension providers time to make sure those internal models are compliant before the final 2016 deadline.
The issue of transfer values has been a hot topic recently as pension providers have sought to shift customers and scheme members away from guaranteed with-profits pensions to non-guaranteed with-profits products or unit-linked pensions. The FSA has tightened regulation in this area with an amendment to the Financial Businesses Act, which took effect on 1 July 2014.
It set out how businesses should calculate transfer values to ensure good practice, and to make sure that consumers are appropriately compensated for the loss of their yield guarantees.
Because Denmark’s pensions sector is weighted heavily towards life-insurer providers, the national regulator decided to create equal competitive conditions within its own borders, by bringing pensionskasser (pension savings institutions) within scope of the Solvency II regime.
This has led to some consternation from the country’s pensions industry over the new IORP Directive, which does not include capital requirements as stipulated under Solvency II.
F&P has said that the omission of the requirements would lead to unequal rules for Danish pensionskasser and pension funds in the rest of Europe.
The changes to pensions taxation made by the Social Democrat-led coalition elected in September 2011 continue to draw criticism. F&P has warned that the move towards effective advance taxation on pensions in Denmark means pension tax receipts will be lower in the future.
In 2013-14 regulations on lump-sum pensions (kapitalpensioner) were changed to allow holders to pay less tax — but in advance rather than at the payment stage — by changing to another type of lump-sum pension called an old-age savings (aldersopsparing). Prior to that, a ceiling was introduced on payments into fixed-term pensions (rate-pensioner).
Søren Andersen, managing director at Willis, notes that some pension providers have linked the switch from kapitalpensioner to the change to non-guaranteed pensions, because it only allows customers or scheme members to change from a kapitalpension, with an embedded guarantee, to an aldersopsparing, with no guarantee.
In May, the government set up a new pensions commission to analyse the country’s pension system and resolve the problem of complex rules and the high taxation.
The commission, chaired by Torben Andersen, professor of economics at the University of Aarhus, is looking at how to create a more transparent system that is attractive to all savers.
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