How are pillar 2 arrangements changing. icpm 2014 Discussion Forum June 2, 2014, Paris. Peter Melchior, PKA

Transcription

1 How are pillar 2 arrangements changing icpm 2014 Discussion Forum June 2, 2014, Paris Peter Melchior, PKA PKA A/S Tuborg Boulevard Hellerup

2 Pillar 2 has always been Defined Contribution. No Defined Benefit. No Hybrid. But our DC-schemes might have given the impression of being Hybrid-schemes. You could call them DC-schemes in disguise. icpm DISCUSSION FORUM, Paris, June 2,

3 The Pillar 2 scheme providers are insurance companies and occupational mutual funds. We have commercial insurance companies and we have non profit insurance companies owned by the organizations on the labor market. We have schemes bases on the collective agreement on the labormarket and we have schemes only covering one company. They were all until few years ago - DC-schemes with guaranties. The Danish pension funds are under same legislation as the insurance companies. icpm DISCUSSION FORUM, Paris, June 2,

4 DC scheme DC means that the employees bear the total risk. The employers have no other obligation, than to pay the premiums. What is the guarantee and what does it mean? icpm DISCUSSION FORUM, Paris, June 2,

5 The element of guarantee The employees get a guarantee of a minimum nominal level of the pension. Do they still bear the total risk? It seems they don t But to a large extend they do! icpm DISCUSSION FORUM, Paris, June 2,

6 Guarantees in mutual funds Does a guarantee make sense in a mutual fund? If something goes wrong, who should pay? You might have some financial buffers in the fund, but they are owned by the employees. In case you have different levels og guarantees one group of customers pay for an other group. The employees still bear the total risk icpm DISCUSSION FORUM, Paris, June 2,

7 Guarantees in insurance companies In an insurance company the equity capital bears some of the risk. In a commercial company the equity is owned by external shareholders. In that case you could say that a DC-scheme is a Hybrid scheme. Typically the employees have provided most of the equity by obtaining a reduced yield. The employees still bear almost the total risk icpm DISCUSSION FORUM, Paris, June 2,

8 Guarantees The presence of the guarantees has meant a difference Regulatory rules Impact on the behavior of the management Kept the politicians away Provided a sense of security to the employees icpm DISCUSSION FORUM, Paris, June 2,

9 Guarantees High (too high) guarantees create huge problems Appropriate level of guarantee (making hedging possible) may lead to very sound and robust systems. icpm DISCUSSION FORUM, Paris, June 2,

10 Guarantees High (too high) guarantees create huge problems Appropriate level of guarantee (making hedging possible) may lead to very sound and robust systems. icpm DISCUSSION FORUM, Paris, June 2,

11 Guarantees From the mid 90 s the interest rates dropped substantially. The former level of guarantees became problematic. Part of the industry was a little too slow to lover the level for new business. Introduction of market-based valuation and mandatory stress tests (traffic lights) helped making the situation visible. icpm DISCUSSION FORUM, Paris, June 2,

12 Time to change The continuing declining interest rates, the mortality improvements, the financial crises and the increased regulation (solvency II) was an incitement to change. icpm DISCUSSION FORUM, Paris, June 2,

13 Change We now have 2 models: Market-based pensions (without guarantees) Different investment strategies for different groups The traditional system with guarantees but with very low guarantees - 0% - or with conditional guarantees. Both systems are still DC-schemes. Almost all providers have tried to encourage employees to change to the new model. icpm DISCUSSION FORUM, Paris, June 2,

14 The new systems The new systems are a prudent adjustment to the development The adjustment will secure that the Danish pension system continues to be very robust and stays in the top ranking of pension systems. icpm DISCUSSION FORUM, Paris, June 2,

15 Thank you! Peter Melchior PKA Life & Pensions Nordics, Stockholm 28 May