COPENHAGEN • No country on the planet has a better-funded pension system than Denmark. So, when its life insurance industry encounters some hurdles, it is worth paying attention.
Because of a challenging cocktail of record-low interest rates and stricter capital requirements, pension funds have been transferring risk to customers instead of keeping it on their own books.
Given the developments, the head of Denmark's financial supervisor wants a regulatory rethink to reflect the new world order that, he said, many pension clients do not yet understand. Failure to reach an agreement now just means that rules will probably be even harsher in the future, he said.
Mr Jesper Berg, director-general of Denmark's Financial Supervisory Authority (FSA), said that insurers need to offer a range of risk-weighted returns that target a specified payout at retirement, and that supervisors should be empowered to police those commitments more actively.
Pension funds already divide product offerings into different risk categories, but the FSA says that there is plenty of room for improvement. What constitutes medium risk, for example, varies widely.
It is up to pension funds "to specify the risk-return framework they want to operate within", Mr Berg said in an interview on the sidelines of a conference last Thursday, addressing what is being dubbed the privatisation of risk.
"We are likely to have a job in certifying that they actually follow those things they say and that the information they provide is valid."
Denmark's pension system has been ranked the world's best, five years in a row, by the Melbourne Mercer Global Pension Index.
Total savings exceed US$650 billion (S$917.89 billion), or US$118,214 in assets per capita, placing the industry among the richest in the world, according to UBS' Pension Fund Indicators 2016.
But, in that time, Denmark's pension industry has undergone some profound changes. Payments into market-based products have climbed to account for more than 60 per cent of annual contributions, according to a report last month by the FSA. That is treble the percentage from a decade ago.
The shift to products whose returns depend on the markets, and not a corporate guarantee, means that a "common understanding" is needed of what is "a sensible risk-return trade-off" and what "government information structures" are needed "to support the management of that risk-return trade-off", Mr Berg said.
The alternative may be a wave of even tighter regulation later, he warned.
"Whether it's banks or pension plans or nuclear power plants, if they mess up, it has political consequences and the regulatory backlash is often stronger" than it would have been "if one had managed a meeting of minds at an earlier stage", Mr Berg said.