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Sweden Extends Discount Rate Floor Ahead of Solvency II

Feb. 18 (Bloomberg) -- Sweden’s regulator extended by six months a deadline for removing a temporary floor on the discount rate used by pension funds as it plans to implement rules based on the so-called Solvency II at the start of next year.

Insurance and pension companies can continue applying a floor to their discount rate until the end of 2013, compared with an initial deadline of June, the Stockholm-based Financial Supervisory Authority said today.

The FSA intends to “introduce a new discount rate built on the principals behind the method in Solvency II,” the regulator said. The proposal will be sent out for a public comment period, the watchdog said.

In the rest of Europe, the introduction of Solvency II rules has been delayed beyond its original start date of last year after the insurance industry lobbied against the plan. The regulations, designed to make firms across the region allocate the same capital reserves against risks, may not come into force before 2016.

Norway’s FSA said earlier this month that it doesn’t expect the rules will be fully implemented before 2015. Further delays aren’t ruled out, the authority said.

Plunging Yields

Sweden’s FSA in June last year proposed a one-year floor to the rate at which Swedish life insurers and occupational pension funds discount their liabilities to help the industry cope with plunging yields. In solvency calculations, liabilities are discounted by a market rate and their value rises when rates fall. Swedish life insurers and occupational pension funds had been under pressure from falling rates at the height of Europe’s debt crisis as investors poured into haven securities such as Sweden’s AAA rated bonds.

The spread, or difference in yield, between Sweden’s 10-year note and the German equivalent widened four basis points to 41 basis points as of 9:18 a.m. in Stockholm. Sweden was the only Nordic debt market to see its 10-year yields rise today.

A switch to Solvency II will follow Sweden’s plan to impose stricter rules on its banks earlier than elsewhere. The Nordic nation sets a 10 percent core Tier 1 requirement of risk-weighted assets for this year, with the minimum rising to 12 percent in 2015. The Basel Committee on Banking Supervision targets 7 percent by 2019.

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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