Denmark to Ease Pension Rules to Reduce Liability Burden

Denmark Agrees to Ease Pension Rules to Cut Liability Burden
Even after today’s moves, Denmark’s 10-year bonds yield about 12 basis points less than similar-maturity German debt. Photographer: Ulrik Jantzen/Bloomberg

Denmark’s government agreed to ease rules for the country’s pension firms to help reduce their liabilities as record-low bond yields inflate the value of their obligations.

Pension companies and life insurers will be allowed to raise the discount rate they use to calculate their liabilities to better reflect long-term growth and inflation prospects, the Business and Growth Ministry in Copenhagen said in a statement late yesterday. The decision sent yields on longer-maturity bonds soaring as the industry’s need to buy up debt assets to match their pension obligations was reduced.

“The demand for duration isn’t as strong as before,” Henrik Henriksen, chief investment strategist at Copenhagen-based PFA Pension A/S, Denmark’s second-largest pension fund with about $50 billion in assets, said in an interview. “Looking especially at the 30-year point, there’s less demand for 30-year bonds due to the new rate curve.”

The Danish move follows similar changes in Sweden, where 10-year yields surged 30 basis points on June 7 after the country’s regulator put a floor on the discount rate pension funds use to calculate liabilities. Nordic pension funds had come under pressure to increase their asset purchases as the region’s haven status from the debt crisis sent bond values higher and swelled the value of their liabilities.

‘Unusual Conditions’

“It’s key that companies have the possibility to create the best possible returns for pensioners in the future and rules and guidelines shouldn’t press companies to make short-term investment decisions due to unusual conditions in the capital markets,” Business and Growth Minister Ole Sohn said in the statement.

The yield on Denmark’s 3 percent note due 2021 surged eight basis points to 1.4 percent as of 11:51 a.m. local time. Denmark’s 30-year yield jumped 13 basis points to 2.08 percent. Yields on bonds sold by other governments perceived as havens also rose. Borrowing costs on Germany’s 2022 bond gained nine basis points to 1.51 percent, while similar-dated yields on Dutch debt increased six basis points to 2.04 percent.

The rate on 30-year swaps in euros climbed 11 basis points to 2.21 percent, widening the difference in yield, or spread, with 10-year swaps by 10 basis points to 28 basis points.

Euro Swap

“Obviously this affects Danish rates but, it is even affecting the much bigger and more liquid euro-swap market,” Anders Schelde, chief investment officer at Nordea Life & Pension, a unit of Nordea Bank AB, said in an interview. “That is most interesting.”

Even after today’s moves, Denmark’s 10-year bonds yield about 12 basis points less than similar-maturity German debt. The central bank has said it is ready to cut policy rates below zero in an effort to defend the krone’s peg to the euro and offset a capital influx.

“Denmark is still a safe haven, but the demand from the pension funds in Denmark, which were forced by regulation to buy government bonds, has eased,” Henriksen at PFA said. “Denmark is still fundamentally a strong case and people would still prefer to invest in Denmark compared to a lot of other eurozone countries.”

The Nordic country will have public debt equivalent to 40.9 percent of gross domestic product this year, compared with an average of 91.8 percent in the 17-member euro area, the European Commission said on May 11.

More to Come

The government of Prime Minister Helle Thorning-Schmidt on May 25 predicted a smaller budget deficit for this year than announced in December and the shortfall will shrink to 1.7 percent of GDP next year, well within the European Union’s 3 percent threshold, it said then.

The government’s decision to ease pension rules, signaled last week, “will reduce the industry’s need to purchase long interest-bearing assets and will lead to higher yields and a steeper curve for maturities longer than 20 years,” Nordea analyst Mik Jorgensen said in a note to clients today.

Other nations are also looking into easing pension rules. In Finland, the parliament votes today on combining pension funds’ insurance risk and investment risk buffers into a solvency capital buffer, meaning pension funds won’t be forced to sell investments that drop in value to comply with solvency rules.

In the Netherlands, the government proposed on May 31 that retirement funds be allowed to calculate financial buffers on expected long-term interest rates, making them less reliant on daily interest rates.

The changes to the Danish pension system also seek to enable companies to phase out guarantees to their customers and instead offer products that track market values, the government said.

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