Finansinspektionen Proposes Temporary Floor to Discount Rate
12 June 2012 (PLANSPONSOREurope.com) - Sweden’s pension regulator Finansinspektionen has this week submitted a proposal for comments that insurance companies be temporarily offered the possibility to apply a floor for the discount rate to protect the interests of insurance policyholders.
The regulator acknowleged that life insurance companies and occupational pension funds have recently found themselves under considerable pressure as market rates have fallen substantially, while interest rates are now at historically-low levels.
Finansinspektionen adds it considers the market conditions at present to be exceptional and difficult to predict and therefore wishes to give insurance companies the possibility option to apply a floor for the discount rate. Firms have been given the opportunity to calculate discount rates according to the current method, but based on the closing rates as of 31 May 2012. The regulator proposes that the floor will apply for one year.
This proposal aims to counteract insurance companies selling their shares short and buying interest-bearing assets. The regulator warns these actions risk creating a ”negative spiral” of continued falling share prices and interest rates, which could further aggravate the situation. In the long run, it says, there is a risk that insurance policyholders would receive smaller pensions.