DENMARK - Danica Pension, part of Denmark's Danske Bank, has raised the account yield on its traditional pension plan and lifted the transfer penalty it introduced last autumn to deal with underfunding.

The account yield will rise from 1.5% to 2.25% with effect from tomorrow (1 October), the company said in a statement. It has also removed the penalty on transfers and withdrawals, which was in force from 28 October , 2008 and was originally set at 5% but which has recently been cut to 2%.

"Throughout 2009 the financial reserves have increased significantly, not least in the third quarter," said Danica Pension's managing director Henrik Ramlau-Hansen. "There is therefore already room to give some extra [interest] to customers, and to remove the transfer penalty.

"With interest rates at a low level, however, the account yield should be expected to stay low over the next few years", he warned, adding that customers should choose the unit-link products rather than the traditional plan in order to benefit more from the upswing in the financial markets.

Danica Pension introduced the transfer penalty because investment assets backing its traditional plan, which has a guaranteed element, had dropped below the face value of customers' savings. Other Danish pension providers including Skandia, SEB and Topdanmark put similar penalties in place.

The Danish government stepped in at the end of October last year to support the pensions sector as it struggled with assets falling below the value of liabilities, by agreeing a rescue package which, among other measures, allowed funds to use a yield curve based on Danish rather than euro interest rates.

The Danish Insurance Association is now in talks with the Ministry of Economic and Business Affairs to have this package extended beyond the end of this year.

Ramlau-Hansen told IPE he believed the yield-curve measure should remain in place well beyond the end of this year. "We want that to continue into 2010 and 2011 because it supports and encourages Danish pension funds to buy Danish mortgage bonds," he said. If the funds were to divest the bonds, there could be major repercussions for the housing market, he said.

"They should probably stick to the Danish yield curve until 2012 when Solvency II kicks in," he said.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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