Guaranteed pensions products in Denmark and Sweden for a long time looked too good to be true and perhaps they are. At least, they are too expensive for the providers to retain, which has led to various strategies - either closing the products for new investors or persuading people to opt for non-guaranteed products. Pirkko Juntunen reports
In Sweden, the debate about the issue of guarantees was renewed in early September when Länsförsäkringar Liv, the life and pensions arm of the insurer, closed its traditional guaranteed product to new investors. Existing customers can, however, continue saving within the existing high-guarantee scheme.
Jörgen Svensson, CEO of Länsförsäkringar Liv, said the traditional guaranteed product has performed well over time, but because of low interest rates the company has to adjust its assets, so that it can pay its liabilities and guarantees as agreed.
Gustav Karner, head of asset management at Länsförsäkringar, said closing the guaranteed fund to new business means cost savings from reduced marketing and sales effort which will ultimately benefit existing customers. He also says that new products will most likely be with zero guarantees until the market environment changes. "As long as the interest rates remain at current lows the liabilities are valued to high levels. We cannot be selling SEK100 (€10.95) notes for SEK90," he says, adding that new products would probably be more flexible as the rate of the guarantee could be changed in accordance with market conditions.
Another issue that is problematic for Swedish pension providers is the dearth of long maturity bonds making it hard to match liabilities. "Our public finances are in pretty good shape, so the government does not need to borrow money, exactly the same problem that Norway has," he explained.
The traditional life and pension company liabilities are anywhere between SEK1.1bn and SEK1.6bn with a duration of 15 years whereas Swedish government bonds with more than a decade's maturity total less than SEK100bn. Länsförsäkringar, is by no means the only company in Sweden, or the Nordic region, with these issues.
According to recent research by Söderberg & Partners, the investment consultant, life and pension companies are heading for the perfect storm where the stock market is falling forcing reallocations to long-bonds. The demand for long-term bonds leads to falling yields increasing liabilities. In order to match liabilities they have to de-risk and sell more stocks which results in the equity markets falling further.
Joel Grönberg, a London-based investment consultant at Söderberg & Partners, says the problems are exacerbated because life and pension company assets are such a huge part of Swedish capital markets. "This may lead to the spiral of death where your solvency ratio is so low that you can never afford to come back up," he comments.
Karner at Länsförsäkringar said that the firm had been de-risking during June, July and August, which according to Söderberg & Partners is what most other life and pension insurers will have to do and thereby settle for lower returns for the foreseeable future.
Söderberg & Partners commends Länsförsäkringar for their actions, adding that not all will survive, such as SalusAnsvar, a smaller local player, but even those who are not near bankruptcy, such as SPP Liv, may have to get capital injections from their owners, Storebrand. Other providers, such as Kåpan, the pension provider for government employees, will have to get used to significantly lower returns.
Söderberg & Partners recommend a restructuring of the Swedish government debt or amendments to the rules governing the calculation of discount rates for life and pension companies.
The fallout from the current situation will likely be, according to Söderberg & Partners, that many will follow Länsförsäkringar and close their guaranteed products, whereas others will have to increase their premiums. They also think that it will renew the debate about transfer rights in Sweden as people get stuck in low yielding products.
Grönberg said: "In order to be able to have risk levels we are used to, guarantees have to come down to zero. We will see products with low guarantees which over time can build up their risk-levels."
The situation in Denmark is slightly different. This is because of a different regime for marking liabilities to market. There, the country's providers are getting rid of guarantees all together both for existing members and new. Industry-wide providers such as Industriens Pensions, the pension fund for industrial employees, are insurance companies formed through collective agreements between unions and employers.
Some of these providers believe they can transfer from guaranteed returns to market returns in one fell swoop, which is the case for Industriens Pension. It will make the change from 1 December 2011 and to sweeten the pill it is giving members 20% on top of their savings.
The Danish FSA has given approval; the argument is that the unions speak for the members so there is no need to poll the members separately. However, the regulator has indicated it is not certain about the members' individual rights in such cases.
Other providers, not backed by unions, have to ask their members to move to non guaranteed products. Nordea and PFA have done this and also sweetened the deal by adding the value of the guarantee on top of what the individual has already saved.
Søren Andersen, founder and CEO of Invensure, a Danish actuarial and investment consultancy which recently merged with Wassum, the Swedish investment consulting and advisory firm, says it is a good but complex way of conducting a liability transfer. "Customers only get the deal if they stick with their current provider," he said.
Andersen said in cases with the union-backed providers, such as Industriens and Sampension, which decided to scrap the guarantees from 1 January 2011, without polling the individual members, has already led to a lawsuit.
"A group of SamPension members have taken the case to court and this is ongoing," he comments. Anderssen pointed out that even if the court decides against Sampension, it does not necessarily render the Industriens deal illegal as well. "Industriens is a much younger company and the legal setup around the guarantees might be different."
Another route was that taken by FSP, the pension fund for the financial industry, which is not a union-backed entity. FSP managed to persuade more than 70% of its members to switch from the guaranteed products, but without any sweeteners on top. "Clients just gave up their guarantees," Andersen says with disbelief.
The media scrutiny that followed led the Danish regulator to look into the deal and reprimanded FSP for its unclear marketing materials. This resulted in FSP having to send out clarifications, but the deal stands.
The current market environment seems like it will spell the death of guaranteed products. Companies can sugar coat their decisions or offer what now seems to be a good deal but whichever way companies are choosing to get out of their expensive commitments, customers who still have the opportunity to buy guaranteed products could do very well out of them. However, if the companies cannot afford the guarantees they are not much use but with a legally binding agreement customers at least have protection but whether or not lawsuits is a good thing for the pensions industry or anyone, bar the lawyers, is another matter.