SWEDEN - Swedish pension companies are currently meeting the regulatory solvency requirements and have "plenty of liquid assets", although a continued "major decline" could change the assessment of the companies' resistance, the Finansinspektionen (FI) has warned.

The Swedish Financial Supervisory Authority has confirmed a 25% drop in Swedish share prices and long-term interest rates since the middle of 2008 has had a "negative effect" on the capital of pension companies.

It pointed out falling share prices has reduced the value of companies' shareholdings while lower interest rates have resulted in a "higher value of commitments as calculated for the solvency assessment".

Although an increase in the value of interest-bearing assets has had a "certain counteracting effect", the FI admitted the capital "risk buffer" for companies offering traditional pension insurance is decreasing.

The organisation pointed out at the last report of the traffic-light model on 30 June 2008, pension companies were considered to have a "good capability" to withstand extreme price changes. (See earlier IPE article: Swedish pensions maintain capital buffers)

It confirmed this is still the case as its current assessment of the situation is "all pension companies are fulfilling the regulatory solvency requirements" - which means they hold the level of capital required by law to guarantee policyholders' pensions.

That said, the FI has highlighted possible concerns for the future solvency of pension companies as it warned "the high resistance [of pension firms] cannot be restored in the industry as a whole in the short-term,", adding a "continued major decline in share prices and interest rates" could alter the authority's current assessment of the financial position.

The organisation pointed out in the current market conditions, the pensions industry has "limited possibilities" in the short-term to reduce risk-taking by selling off high-risk assets.

It claimed there is a risk that if all or many of the companies try to sell shares and move into long-term interest bearing securities at the same time, this could "worsen the asset-price changes", and could have an adverse effect on the companies.

The FI also noted the limited supply of long-term interest bearing assets is also perceived as a potential problem by the industry, so it has revealed it intends to increase the supply by changing the calculation of the discount rate for occupational pensions.

At present, the discount rate is calculated as an average of the government bond interest rate and the swap interest rate, however the authority confirmed "in order to facilitate a market for long-term covered bonds", the FI can change the current regulations to a calculation based n an average of the government bond interest rate and the interest on covered housing bonds.

While the FI admitted it can decide on a change to the discount rate "at short notice", it claimed for the move to "provide a more significant effect", it would require the Swedish government to issue covered bonds with "longer maturities than what is normally the case today".

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