Danish Schemes Cross Swords With FSA Over Pension Model Change

Two Danish pension funds have been blocked by the regulator from shifting all pension savings to a market-rate basis, from the current average-rate investment method.

The pension fund for architects, AP (Arkitekternes Pensionskasse) and the pension fund for agricultural academics and vets, PJD (Pensionskassen for Jordbrugsakademikere & Dyrlæger), said they did not understand the decision and could appeal it.

The schemes had planned to hold a collective vote on the proposal at their respective annual general meetings (AGMs) by way of consent, but the Danish FSA (Finanstilsynet) said they would be violating good practice if they failed to obtain individuals’ consent.

In letters to AP and PJD dated 26 March, the FSA said the funds – which are both run by the DKK290bn (€38.8bn) pensions provider Sampension – would be contravening rules on good practice for insurance distributors if they decided to transfer members with a conditionally guaranteed, average-rate product to a market-rate-based, lifecycle product without allowing each of their members an individual choice.

Between them, the two funds have approximately 18,300 members, according to their respective websites.

“The FSA judges that the pension fund has not proved that it is objectively justified from the point of view of the members to undertake the change through a collective ballot, that groups of members will not be disadvantaged by change, and that the aim of the change cannot be achieved by offering members an individual choice,” the regulator wrote.

Funds consider appeal

Mette Carstad, chairman of AP, said: “We take note of this, but are currently considering whether we should appeal the decision to the Danish FSA, because we still believe that a collective transition to market-rate is the most appropriate and value-creating way to change product, both for the pension fund and for the individual member.”

PJD chairman Erik Bisgaard Madsen agreed, adding that there had been more than a year and half of “intensive work and an ongoing dialogue” with the FSA before the ruling.

“We think that a collective transition to market-rate is a solution in the collective interest with a fair distribution of profits which safeguards all members in the same way,” Madsen said. “No one is disadvantaged or loses money through a switch, and all members achieve a more appropriate investment profile and better opportunity to adjust their savings risk individually.”

Both chairs said they did not understand why the regulator would not permit this decision to be made at the AGM.

In recent years, a number of pension providers in Denmark have been shifting to market-rate or unit-linked products, in which an individual’s savings balance is directly affected by financial market performance. 

These have gradually replaced average-rate or with-profits products, where the risk is borne in a more collective way and returns are smoothed from year to year by the provider. Some average-rate products have traditionally involved return guarantees.

Some providers have opted to switch only those individuals who have actively chosen to do so, while others have shifted only future pension savings to market-rate. Providers such as Industriens Pension have made a more comprehensive move and changed the basis of all existing and future savings to market-rate in one go.

Ulla Brøns Petersen, director of the FSA’s consumer affairs and financial intermediaries division, told IPE that the authority had looked into several cases of pension companies wanting to make such wholesale shifts.

It had developed some criteria that must be met in order for pension companies to fulfil their obligation to act in an honest and fair way to the scheme members, she said.