Sweden Tells Lifers Not to Rely on One-Year Liability Fix

Sweden’s financial regulator is warning pension funds and life insurers not to assume a year-long reprieve that’s eased their liabilities will be extended.

“This may provide some temporary relief, but the companies still have to address the longer-term problems,” Otto Elmgart, head of supervision for large insurance companies at Sweden’s Financial Supervisory Authority, said in an interview.

The FSA this month proposed putting a floor on the discount rate used by Sweden’s life insurers and pension funds to calculate their liabilities, after declining market rates inflated the cost of repaying savers. The temporary easing of rules means companies will no longer need to dump shares and buy up interest-bearing assets to match their obligations, ending a cycle that had grown untenable for the industry.

“This provides some stability in this chaotic period so that during this time of stress companies don’t go for myopic actions that may lock in those very low yields,” he said.

Pension funds and insurers affected, which manage about 3 trillion kronor ($427 billion) in assets, still need to adjust their businesses to ensure their investments can withstand market volatility in the longer term, Elmgart said.

A return to a more market-based discount rate would prompt pension funds and life insurers to resume their purchases of long-dated debt assets to match liabilities if yields stay low.

Debt Spreads

The difference in yield, or spread, between Sweden’s 10-year bonds and similar-maturity German bunds narrowed to two basis points today from six basis points after rates on Sweden’s 3.5 percent note due 2022 eased to 1.49 percent.

Sweden’s 10-year yield jumped 30 basis points, or 0.30 percentage point, to 1.45 percent on June 7 as the Stockholm-based FSA proposed the rules to limit pension liabilities. Denmark followed on June 12 with similar legislation as Nordic regulators fight record-low rates spurred by the region’s haven status from the debt crisis.

“The FSA’s move was welcomed by the market, but insurers really do need to address the longer-term problems since the proposal is only temporary relief,” said Jussi Hiljanen, head of fixed-income research at SEB AB in Stockholm. “The sharp reaction to the initial statement came as it decreased the acute risk of forced bond buying by life insurers.”

‘Bullet Proof’

Sweden’s pension and life insurance industry will need to adjust to European Union-wide rules due to become effective in January 2014 -- the so-called Solvency II package -- and shouldn’t see this month’s regulatory intervention as a signal they’ll receive support in the future, Elmgart said. Solvency II is a framework based on mark-to-market principles.

In solvency calculations, insurance liabilities are discounted at a market rate and the value of those liabilities rises as rates fall. Swedish life insurers and pension funds have watched their obligations soar in part as guaranteed returns became too costly given market rates, the FSA said.

The industry is in part to blame for the mismatch in assets and liabilities after companies constructed products that aren’t feasible in volatile markets, Elmgart said.

“They should look over their liabilities to policyholders and change their products so it’s something that can be sustainable over various market scenarios,” he said. “You can’t have guaranteed products that are only sustainable when equity markets trend upwards. They need something more bullet proof.”

Best Returns

Regulators in the Netherlands and Finland are also exploring ways to ease pension investment rules. Denmark said last week its decision to intervene will help its pension industry foster longer-term investments.

“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 June 12.

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