Danish mutual pensions firm Velliv has announced it has now stopped offering new pension plans under its traditional average-rate model, and is launching a campaign to encourage people with these older-style products to switch to a market-rate plan.
The moves have been prompted by the Danish FSA’s (Finanstilsynet) recent consultation on cutting the basic interest rate used to set guarantee levels for average-rate (gennemsnitsrente) pensions which carry a yield guarantee.
According to a new executive order from the Danish financial regulator – which was out for consultation this summer and is due to take effect on 1 January – the basic interest rate (grundlagsrente) is to be reduced to 0% for the first time, sending the guaranteed yield for newly-agreed traditional pension plans negative because of other costs involved.
In its interim report for January to September 2020, Velliv said: “As a result of the expectations for the future, the Danish Financial Supervisory Authority has sent a new executive order for consultation, which means that the basic interest rate after costs and risk supplements for the traditional pension product will be negative by approximately -0.5%.”
The mutual pensions firm, which used to be the Danish arm of Nordea’s life and pensions business, said the financial markets were characterised by low interest rates and the risk of increased volatility.
It noted that the Council for Return Expectations had lowered its expectations for future returns.
Velliv said that for customers with lower base interest rates in the traditional pension product, their return risked becoming lower than inflation in the future.
“For this reason, in the traditional pension product area, Velliv is going to launch a product-switching campaign for customers with a lower yield guarantee, and for other customers,” the firm said.
“Likewise, Velliv has stopped making new traditional pension agreements, which is in line with our advisory obligation, because customers are not served by having a negative return on the traditional pension product with yield guarantee,” Velliv said.