A large proportion of the Danish pension policyholders have taken out a pension product containing the promise of a guaranteed nominal interest rate. The historical low interest level combined with the regulation for technical provisions forces insurance companies and pension funds to enter into short term investment decisions.
This is addressed in the agreement between Minister for Business and Growth, Ole Sohn, and Forsikring & Pension, in which insurance companies and pension funds are given more flexibility to set out a long term investment strategy.
Minister for Business and Growth, Ole Sohn, says:
Chair of Forsikring & Pension, Peter Damgaard Jensen, says:
The technical change in the agreement is to make a lift of the long end of the discount rate curve, used for the calculation of technical provisions, equivalent to a more ordinary market condition and in line with the generally agreed long term projections for growth and inflation. This avoids insurance companies and pensions funds locking customers’ future returns at the current historical low level interest rates. With this change of the discount rate curve an important step towards the future EU-regulation of insurance companies (Solvency II) is taken.
The agreement contains several other initiatives. Among these are restrictions on dividends, a temporary limit on upwrites of pensions and increased transparency. Measures are also taken to ensure the robustness of the capital going forward and to prevent any subsidizing between generations of pension savers coming from the change of the discount rate curve.
Along with the changes implied by this agreement is it important to stress that the insurance companies and pension funds currently hold sufficient capital to resist a further decline in interest rates and that there is no immediate risk of the sector not being able to live up to their pension promises. However, a continuing low interest level can force companies into short term investment decision on the expense of pension savers’ long term objectives.