mast image

Special Report

Impact investing


Top 1000 Pension Funds: Tax reforms and Solvency II on the agenda

Some pension funds defy a 2% cap on dividend payments agreed in the government-industry pact while the regulator continues to update and tighten the rules, writes Rachel Fixsen

When the Danish government acted last year to cushion the country’s pension funds from the effects of record-low bond yields, one of its conditions was that the funds keep their payouts to scheme members low.

The package of measures agreed jointly by the ministry of business and growth, industry association Forsikring & Pension (F&P) in June 2012 centred on an adjustment to the long end of the discount rate curve used to calculate pension liabilities.

Rather than being based on long-dated bond and swap yields, beyond the 20-year point the curve would follow the ultimate forward rate, combining inflation and growth expectations.

Measures were also taken to prevent any transfer between generations of pension savers coming from the change of the discount rate curve.

The agreement also contained a temporary cap on the level of account dividends – the guaranteed interest payment awarded to traditional with-profits pension savings – of just 2%.

The rationale was that pension funds should use capital freed up by the discount rate change to bolster solvency rather than get new customers.

However, some pension funds have awarded payouts above 2%. The Danish pension fund for doctors announced it was keeping its account dividend at 4%. F&P had confirmed that this decision did meet the aim of the pensions pact, given the overall context, it said.

In January, AP Pension said it was maintaining its account dividend at 3.25% before tax this year. This level also respected the agreement, it said. And Lærernes Pension, the fund for teachers, raised its account dividend for 2013 to 3.5% after tax, from 3%.

In 2012, the Danish parliament reformed the taxation of a key private pension product – the kapitalpension, or lump-sum pension. The change had a major impact on individual pension plans, as well as creating a spike in administration.

Contributions to kapitalpension plans were no longer tax deductible from 31 December 2012. It was no longer possible to set up a kapitalpension, and no further deductions could be claimed for contributions on existing kapitalpension.

Part of the tax reform was a measure to encourage advance taxation of deposits in kapitalpension plans by offering a tax rebate. In 2013 and 2014, savers with the plans are allowed to convert them to an aldersopsparing – old-age savings plan – in which they will pay 37.3% in tax as opposed to the normal 40%. However, from 2015 onwards, conversion of kapitalpension to aldersopsparing will once again be subject to 40% tax.

In December 2012 the regulator acted to ensure that funds were valuing their alternatives correctly. Ownership of alternatives such as infrastructure and renewable-energy projects has been increasing as funds seek to diversify risk and invest in assets with long-term stable income streams, but the regulator was concerned that market conditions for such assets had led to uncertainty over valuations and solvency calculations.

It gave pension funds and insurers until 1 July 2013 to provide information on their alternative investments, how often and how they were valued and how the relationship between risk and return was assessed.

The regulator is working on a model for maintaining the supervisory system in Denmark, as the Solvency II regulatory system has been postponed for pension funds until at least 2016.

It is working with the current regime – the individual solvency requirement – to make sure that all pension members are equally protected. To this end, it is working on one standard methodology, inspired by QIS5 – the quantitative impact study for testing Solvency II capital requirements. At the time of writing, the FSA was still discussing the details and implementation of the updated regulatory regime with F&P.

According to the regulator, under the new rules it will be possible for pension funds to use full or partial internal models to calculate their capital requirement. Part of this new regime will ensure Danish pension providers comply with international supervisory standards from international insurance supervisory authorities group IAIS, the regulator says.

In the wake of the global financial crisis, debate has continued on how skilled supervisory boards of financial institutions should be. In February, the FSA increased the demands on pension board competence, saying the trustee boards had to have not one but two members with sufficient knowledge of investment- and insurance-related issues. At least one member of the trustee board had to have day-to-day management experience from a relevant financial firm.

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2558

    Asset class: Private Equity.
    Asset region: Global or Swiss.
    Size: USD $5-10m.
    Closing date: 2019-08-20.

  • QN-2559

    Asset class: Multi Assets.
    Asset region: -.
    Size: EUR 15m (may be split into two mandates EUR 7.5m).
    Closing date: 2019-09-06.

  • QN-2560

    Asset class: Private Equity.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

  • QN-2561

    Asset class: Infrastructure.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

Begin Your Search Here