SWEDEN is developing a new system of colour coded stress tests on the lines of the "traffic light" system in Denmark, to assess the financial strength of its pension institutions.
The Swedish Financial Supervisory Authority (SFSA), the Finansinspektionen, is planning to introduce the new system from 1 January, 2006 as part of the EU Pensions Directive and hopes the new measures will act as a base for the Solvency II requirements which are likely to come into force in 2010.
Eva Ekström (pictured), deputy head of supervision at the SFSA, said: “The Danish system is the basis for the Swedish system. It’s the same principle. We have not finished developing the model and we are still working on itwith some companies. The basic idea is that pension funds must be aware of their funding levels and the market value of their assets at all times.”
The Danish Financial Supervisory Authority (DFSA) introduced the “traffic light” system in 2001 following the crash in the equity markets.
The tests work on two basic scenarios: a “red light” under which pension funds must be able to take a 12% decline in equity prices and a 0.7%change in interest rates; and a “yellow light” where pension funds must cope with a 30% fall in equities and a 1% change in interest rates.
Ekström said that the Swedish model is likely to be based on similar parameters.
Following the introduction of the stress tests in Denmark, several pension funds felt indirectly pressured to sell equities to maintain their solvency positions and this triggered a move into bonds.
Ekström admits this is a problem in the Swedish context too, but added:
“We have a better risk appetite in Sweden. I think it is greater than that of the Danes. But we know this is a problem and we are looking at it, but we have no solutions at the moment.”
The EU Pensions Directive is based on the “prudent person” principle. The directive implies that institutions cannot be forced to invest less than 70% in equities, should they wish to maintain such an allocation. If,like in Denmark, Swedish pension funds feel “indirectly pressured” to sell equities and move into bonds, the question is whether the stress tests will contravene the EU Directive.
Bertil Sjö, head of the insurance and market risk unit at the SFSA, said that the stress tests are in line with the EU Directive: “The main purposeof the EU Directive is that it is going to be more prudent and we can set the rules as to what prudent means. We feel we ar sufficiently prudent at the moment, so it is realistic to assume that with the Directive the assumptions are going to be a little easier. So the technical provisions are going to come down a little and this is going to release a lot of capital.
We need to have some kind of control on companies on how they invest this capital and that’s the reason for the tests.”
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