Recognising that the long-awaited national implementation of the EU’s Solvency II regulatory regime for insurers is still a way off, the Danish government and the country’s pensions industry have now extended a deal on the discount yield curve.

It is the latest – and, regulators surely hope, the last – national exercise to tweak the curve used by pension funds and insurance companies to calculate the amount they need to set aside to cover pension guarantees.

But this time, the government has incorporated other measures from its own agenda into the agreement.

It has won agreement from the pensions industry to work towards increasing the financial help funds offer to Danish business.

Back in December 2011, the Danish financial regulator, Finanstilsynet, acted to save pension funds from the pressure stemming from the yield differential between Danish and German government bonds, which was depressing their on-paper solvency levels.

It brought in a new alternative discount yield curve based on a 12-month moving average of the yield differential between Danish and German government bonds.

Six months down the line, however, the government stepped in with a new deal to help the pension funds out of the bind they found themselves in – this time as a result of generally low bond yields.

In a pact signed with pensions industry body Forsikring & Pension (F&P) and Finanstilsynet, the Ministry of Business and Growth bundled changes to the discount yield curve with measures to bolster pension fund reserves – including restrictions on the level of bonuses and dividends they were allowed to pay out.

Under that June 2012 agreement, the long end of the discount yield curve was raised to a level said to equate to normal market conditions, and be in line with long-term projections for growth and inflation.

For maturities of more than 20 years, yields were extrapolated using an ‘Ultimate Forward Rate’ (UFR) of 4.2%, based on long-term growth and inflation expectations.

This use of the UFR matched the EU Commission’s proposal for Solvency II, it was argued, therefore taking the national regulatory system towards its inevitable destination.

The other points inserted into the June 2012 agreement were steps the pension funds had to take to avoid cross-generational redistribution, statements that the funds should cut the use of nominal guarantees on pensions and make more effort to consolidate.

Specifically, pension funds were banned from setting account dividends at more than 2%.

The latter point has since caused some friction between industry and government, with some funds insisting on their right to set higher payouts to customers, and others seeking individual clarification on whether they were permitted to do so.

While extending the yield curve for a further two years to dovetail with expected implementation of Solvency II in January 2016, the new agreement reached just before Christmas 2013 reiterates the account dividend cap – but clarifies the circumstances under which pension funds may exceed it.

The deal also includes a pledge to promote pension fund lending to small and medium-sized enterprises (SMEs), with the parties agreeing to work to strengthen SME access to capital resources, while giving pension companies an acceptable return.

F&P has agreed to make members aware of the potential of new investment products based on pools of corporate loans.

Minister for Business and Growth Henrik Sass Larsen said he was glad all parties in the talks had supported boosting SME access to financing – partly by promoting the options available through the new law on corporate bonds.

“The agreement benefits pension customers and the companies that pension funds invest in,” he said.

F&P chairman Christian Sagild declared that the association was very pleased there was now clarity about how the discount yield curve would be in the period before the European rules came into force.

On the business financing initiative, he said there is no doubt the pension funds will be very interested in investing for the benefit of society.

But the right conditions have to be in place, he stressed, and pension savers have to make a good return from these investments.

“That’s the case for corporate bonds as well,” he said.

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