The effects of equity market volatility on Sweden’s pension funds has been demonstrated dramatically by the recent emergency action taken by Alecta, the largest occupational pensions manager in the Nordic region.
Alecta, formerly SPP, is the quasi-monopoly insurer for the ITP occupational pension system, covering 620,000 white collar workers. In the first nine months of this year, it saw its solvency margin fall from 124% – one of the highest in the industry – to just below 103%. In an effort to raise the solvency margin level to a more acceptable level, Alecta has scrapped a 15% discount on ITP premiums, and clawed back SEK4.9bn (E539m) of the SEK11bn surplus it planned to hand back to ITP member companies in the form of client-company funds.
Alecta’s collective solvency reserve - the difference between the market value of its assets and its insurance commitments – provides a buffer against fluctuations in insurance risks and investment return. Under a solvency policy introduced in 2001, Alecta’s board must take measures when the solvency margin falls below 110% of insurance undertakings. These measures include the allocation or re-allocation of funds – including client company funds - in a minimum amount of SEK5bn.
Client company funds are the ITP companies’ share of a SEK76bn surplus accumulated in the second half of the 1990s. SEK 11bn of this surplus remain to be distributed.
To prevent such a surplus building up again Alecta reduced premiums by 15% at the beginning of this year. It also introduced a new solvency policy that enabled the board to re-allocate funds if the solvency margin rose above 130% or fell below 110%.
Alecta has allowed companies to use their share of these funds as insurance premiums for employees entitled to ITP benefits and as reinsurance premiums for companies financing ITP benefits internally through reserves.
Alecta also created what is in effect a market in client company funds, where companies can trade their share of the funds with other companies at prices of between 80% and 85% of their value.
However, the volatility of the equity markets reversed the position Alecta found itself in. Within 18 month of introducing the new solvency policy, Alecta found it had too little rather than too much money in its reserves. On 3 October Alecta announced that “as a consequence of the general trend of the stock exchange, Alecta has decided to temporarily freeze all use of client-company funds.”
Staffan Grefbäck, the president of Alecta Kapitalförvaltning AB, Alecta’s investment management arm, explains: “The decision to freeze the client-company funds was a temporary measure to gain some time to prepare a package of measures to improve our solvency ratio. Those measures improved the collective reserve by SEK15bn while premium levels were increase by SEK5bn.”
One of the measures was to adopt a three year time horizon for bringing the solvency ration back into line. This gives Alecta more time than it had in the earlier solvency policy, where the margins had to be restored by each year end.
Alecta lifted the freeze on the use of client-company funds on 1 November when it announced a package of measures that were designed to raise the solvency margin to 110%. It has terminated the 15% premium discount, introduced as a result of the favourable solvency margin at the end of 2001. The premiums will be raised to the previous level of 100% on 1 January next year.
It is also clawing back SEK 4.9bn of the surplus funds held by the social partners, the Confederation of Swedish Enterprise (Svenski Näringsliv) and the Federation of Salaried Employees in Industry and Services (PTK).
The rules governing the use of client-company funds remain the same, but with an added restriction. Companies can no longer receive any cash payment from client-company funds that is not related to pension purposes.
There is also a temporary restriction until the end of the year on companies that arrange their pensions through the pensions administrator PRI, preventing them from settling their liability through insurance in Alecta. Under the PRI system, employers make provisions for the pension liabilities on their balance sheets and then take out a special credit insurance.
Alecta believes that the new package will enable it to cope with any future fluctuations in the solvency reserve. “We have reverted to charging 100% of the premiums again until we have improved the solvency ratio sufficiently. Then we aim to lower premiums again,” says Grefbäck. Our aim in future is to be able to manage the collective solvency reserve in future by having more flexible premiums.”