Sweden consults on traffic-light pension model

SWEDEN – The Swedish financial regulator has launched a consultation on a proposal to identify possible problems at occupational pension funds and life companies using the so-called traffic-light model.

Such a system already operates in Denmark, although Sweden now plans to just use red as a signal.

“Using the traffic-light model, FI will be able to identify at an early stage life insurance companies and occupational pension funds that could encounter problems if equity or real estate prices, or interest rates, change sharply,” Finansinspektionen said in a release today.

“In the final analysis, it is a matter of ensuring that the guaranteed future pensions will be paid out. This is apparent from the proposal of the traffic-light model that is today being sent for widespread referral.”

The deadline for comments on the proposal is October 27. The model will be finalised in mid-November.

Just using the red signal would be used to avoid confusion to the used for rating companies. “Accordingly, the companies and funds shall only evaluate one scenario, rather than the previous system of two.”

Apart from this, Finansinspektionen said only minor adjustments have been made compared with previous proposal.

It stressed that the system is one quantitative method of several, and not a regulatory system.

“Being subject to a red light is not considered an infraction of the rules that would automatically lead to a sanction. Such companies would primarily undergo an in-depth investigation.”

Companies with assets corresponding to 2% of the sector’s investment assets will be adjudged as being in a red-light situation.

The equity risk is divided into Swedish and foreign equities. The companies and funds must be able to withstand a price fall of 40% for their Swedish equities and 35% for their foreign equities.

The real estate risk is measured in terms of a price fall of 35%, rather than of 40%. The exchange-rate risk is measured in terms of a change of 10% rather than 12%. The real interest-rate risk is included in the model.