Sweden extends temporary discount rate floor ahead of Solvency II

SWEDEN – Sweden’s financial regulator plans to extend its temporary floor to the discount rate used by pension funds until the end of 2013, at which point it will implement a Solvency II-based discount rate.

A discount rate based on the EU insurance-industry directive had to be brought in early to avoid a gap from opening up between the two sets of regulations, Finansinspektionen (FI) said.

Last summer, the regulator introduced a voluntary, temporary floor for the rate life insurers and occupational pension funds use to calculate liabilities.

In a statement, the regulator said: “The original decision was for a temporary floor until 15 June 2013. FI now plans to extend the floor until the end of the year, at which point it will implement a new discount rate based on the methodology in Solvency II, the pending EU regulations for the insurance industry.”

The original move was designed, it said, to ward off shortsighted behaviour that would have a negative impact on future pensioners.

At the time, falling government bond yields were causing concern that pension funds’ official solvency levels would decline, prompting them to short-sell equities and move to interest-bearing assets.

Even though it is still unknown when the EU-wide Solvency II regulations will take effect, FI said it would implement a discount rate based on the directive as early as next year because a long-term solution had to be in place when the discount rate floor expired.

“In practice,” it said, “undertakings need to take into consideration both the current and pending regulations when managing their investments. With this proposal, we are shrinking the gap between the two regulations and at the same time reducing the problems with pro-cyclicality.”

The Solvency II discount rate curve consists of two parts, FI said.

Market rates are used for maturities in deep, liquid, active and transparent markets, while interest rates for longer maturities converge toward the ultimate forward rate (UFR) – a long-term equilibrium rate.

“It is too early to comment on the precise design of the method, but the intention is to implement a method that in practice is very similar to what will be implemented in Solvency II,” FI said.

It will develop a proposal for the method during the spring that will be submitted for consultation.

A decision will then be made in the autumn.

FI said its board of directors would decide on the extension of the discount rate floor on 21 May.