Swedish insurer Skandia has carried the torch for unit linked pension plans in Denmark, a country traditionally more comfortable with the system of guaranteed returns.
In 1998 Skandia established SkandiaLink to sell unit-linked policies to a market that did not then exist. Gerner Abildtrup, director of SkandiaLink, recalls: “Unit linked as a concept was quite new in the Danish market. People were unused to equities, and this is measured by the fact that Denmark is the largest market for bonds per capita”.
The lack of an equity culture discouraged the provision of any real investment choice, he says. “The portfolio investment was common to all companies. When one company had a split of 35% in equities and 65% in bonds, the other company had exactly the same profile. So the returns over five to 10 years were almost precisely the same. When we introduced the unit-linked company and the possibility to go up to 100% in equity-based funds, it opened people’s eyes.”
The Danish pensions market was also less interested in returns than costs and price, he says. “The traditional Danish life and pension system was concerned with competing on price, and the dominant players had a strategy of reducing costs and the price for risk coverage. Therefore the market was educated only to talk about cost and price. How companies invested their savings was completely absent from the minds of the brokers.”
Before it sold any products, SkandiaLink had to sell the idea that unit- linked schemes could produce higher returns. That meant educating the brokers, says Abildtrup. “There was no tradition of being a player in the corporate pensions plans market and we did not have any relations with the brokers.”
Another strategy was to appeal directly to the public, he says. “We lobbied the financial press to explain why the traditional life insurance system with the long-term guaranteed interest rates were not that compatible to long term investing.”
These combined initiatives paid off. SkandiaLink now dominates the unit-linked market, although the large Danish insurers have entered the field with their own products.
Skandia has hedged its bets with a pensions product to appeal to the more cautious investor, the BonusPension. Skandia BonusPension was launched last year as a with profits alternative to the unit-linked product.
“It is pitched midway between a genuine or pure unit-linked and the traditional life insurance system in Denmark,” says Abildtrup. “Both products are in exactly the same pensions market. So our mission is to get out to the decision-makers in the companies and explain if you have this profile you may prefer the unit-linked model or if you have this profile you will be more attracted to the with profits model.”
People can switch between the two once a year at no cost, he says. “With the stock market we have today, people may want to stay with the with profits style pension for the time being. But when the market changes they can switch into the unit-linked model. If the employer has a contract with Skandia through a broker, the employee will have three options – unit-linked, with profits or a fifty-fifty split between the two.”
Currently, Skandia’s 60% of Skandia’s pension business is with profits and 40% unit-linked.
SkandiaLink has added a feather to its cap with the business of Novo Nordisk, a Danish health care company with 14,000 employees. “They have to take an element of the traditional life insurance system but they have an option for a certain amount of the contribution to choose between unit-linked and traditional life insurance,” says Abildtrup
It has also gained the interest of AP. Møller, the shipping and transportation company, which also approached them for a quotation on the costs of a unit-linked option to its corporate pension scheme.