DENMARK - Danish pension companies could be forced to give younger customers lower benefit payments from their guaranteed pensions compared with those received by the current generation of pensioners, if the current financial crisis continues.

Younger customers typically receive a regular return of approximately 4.5% as pension companies at this stage do not have an age differential in their investment return rates.

However, Jesper Kirstein of consulting firm Kirstein Finans, believes pension providers may in the future need to introduce an economic age split if equities continue to fall with the same speed as we have seen in recent weeks because the market value of assets in ‘guaranteed' plans may not be sufficient years down the line to cover the current level of guaranteed payouts.

Just as importantly, some pension companies are introducing a ‘shield rate' or market reduction on the nominal value of assets because those wanting to moving their money elsewhere leave other investors to carry the burden of lower valued assets should they be granted the nominal value of their pension plans.

"It cannot be ruled out that in order for the [pension] companies to save money they will have to reduce their interest rates, and that may lead to a change in the solidarity guaranteed," said Kirstein.

"In the end it will most likely hurt the younger customers, as they risk receiving a lower rate [of return] than the elder customers", he added.

The current financial crisis has led life and pensions provider Topdanmark to introduce a so-called ‘shield rate' of 5% to prevent their customers from taking their pension plans elsewhere at more than they are technically worth under today's valuation of assets.

Shield protection means if a customer wishes to take their pension plan to another company before it is due to pay out they will pick up a penalty worth 5% of the assets in custody because the market value of the assumed pension savings exceeds the value of the actual assets.

"However it only applies to the with-profits pension schemes on Liv 1, because this is a different investment strategy which follows the stock markets' ups and downs," said Jens Langergaard, communications director at Topdanmark.

"The reason we introduce a shield rate is solely because if a customer chose to move their investments now they would get 100% instead of 95% as the parity is at the moment. They would actually receive money that is not theirs, but money that belongs to the remaining customers," added Christian Sagild, director at Topdanmark.

"We have chosen to take this action in order to prevent people from speculating against the rest of the customers. The assets have fallen so much in value that one [person] could take DKK1m of their savings and buy assets elsewhere at a substantially cheaper rate. We believe that in the current situation where the markets have declined so much, it is only fair that those who might choose to speculate against the company should also pay their share of the loss," he added.

Sagild pointed out Topdanmark is not in any financial difficulties but said the shield rate could increase again if the financial crisis continues.

Roughly every fourth citizen and every sixth business in Denmark has insurance-based products with Topdanmark, making it the sixth-largest life assurer in Denmark.