DENMARK - The DKR105bn PKA is to introduce a zero guarantee scheme for all new business from 1 January next year.
The move is a reflection of a wider trend by labour market pension funds in Denmark away from the guarantees – some as high as 4.5% - traditionally offered to members.
PFA Pension, one of Denmark’s largest pension providers, introduced its version of a zero guarantee scheme last year and Juristernes og Okonomernes Pensionskasse (Joep), the Danish pension fund for lawyers and economists, introduced its new zero guarantee scheme for new members this year. Many of the large profession-wide or sector-wide funds that make up the second pillar are expected to follow suit.
“From 1 January next year we will change the whole system so we will offer guarantees based on an interest rate of zero percent,” said Peter Melchior of PKA. “Some people find it ridiculous but it isn’t because if you invest only in equities you should be able to guarantee zero percent even in the years when the interest rates fall 30 or 40%.”
He added: “We will still issue guarantees because some guarantees are part of a product that [members] want but you have to be very careful when you issue guarantees with a duration of more than 50 years.”
CIO Michael Nellemann Pedersen stressed that the zero guarantee was only for new business and the 4.25% guarantee would still apply for existing contracts of that nature.
However Melchior added: “If a member from the old business has a pension guarantee based on high rates, when they have an increase in salary, that’s considered new business and that new business will be based on zero percent.”
Rather than purely a function of the low interest rate environment, Melchior said the move to zero guarantee was in part due to political pressure. A government report two years back found pension funds should be able to survive “Japanese-like” conditions.
“Under very low interest rates, we don’t think it’s all that dangerous to promise 1% or 1.5%,” he added.
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