Denmark’s financial watchdog has produced an analysis of market developments in the pension industry for last year, in which it has focused on the big difference between unlisted investment returns for each of the two types of pension product offered — market-rate and average-rate.
The Danish FSA (Finanstilysnet) has long kept a keen supervisory eye on how pension firms manage alternative, or unlisted, assets, as well as consumer interests regarding market-rate products, which have gradually been taking over from the older-style average-rate pensions, which smooth returns from year to year and sometimes have a yield guarantee element.
In its 2023 report on market development for life insurance companies and lateral pension funds, published today, the FSA said pension firms made a total profit for the year of DKK10.6bn (€1.4bn), up from a loss of DKK11.5bn in 2022, mainly due to last year’s positive returns on listed equities.
Because listed equities made up a far larger proportion of market-rate products than they did of average-rate products, the FSA said the absolute return in market-rate products had been significantly higher for the former pension type than the latter in 2023.
Meanwhile, returns on unlisted equities in average-rate products rose between the years to 6.9% from 5.3% in 2022.
For market-rate products, though, returns on unlisted shares fell to 3.3% from 11.1%, the watchdog said.
“The return on unlisted shares in market-rate products has therefore gone from being more than twice as high as the return in the average-interest products in 2022, to being less than half as high as the return in average-rate products in 2023,” the FSA said.
“Market rate products are, among other things, characterised by the fact that the customers bear the investment risk themselves and so may experience a decrease in their pension savings and pension payments,” the FSA commented.
The authority said it continued to focus on customers being offered pension products that were appropriate throughout the life of the products, and that reflected the needs of the target group.
“Another important focus area for the Danish FSA is the pension companies’ alternative investments and their valuation,” it said.
In total, pension companies’ portfolios of alternative investments amounted to DKK766bn at the end of 2023, up 4% from a year before, the report showed.
Alternative investments – a category including private equity, credit, infrastructure, agriculture and hedge funds – dipped as a proportion of the companies’ total investment assets to 17.7% at the end of 2023 compared to 17.9% at the end of 2022, according to the report.
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