Denmark's government agreed to ease rules for the country's pension funds to help reduce their liabilities as record-low bond yields inflate the value of their obligations.
Pension funds 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 Tuesday. 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.
“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,” Mr. Henriksen said.
Other nations are also looking into easing pension rules. In Finland, the parliament votes Wednesday 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.