Denmark’s EUR 410bn pension industry gets wake-up call

Denmark’s central bank says it won’t come to the rescue of the country’s EUR 410bn pension industry, should it need cash to meet clearing requirements due in 2023.
Denmark's central bank | Photo: Jens Dresling
Denmark's central bank | Photo: Jens Dresling
By Morten Buttler and Frances Schwartzkopff / BLOOMBERG

Governor Lars Rohde is telling the industry to find other sources as the deadline to implement European rules draws near. Being a lender of last resort for the banking system “is more than enough for us,” Rohde said at a conference in Copenhagen.

Denmark’s pension industry, which dwarfs the Scandinavian country’s economy, uses interest rate swaps to hedge long-term liabilities. The funds have so far been exempted from having to clear the directives through a clearinghouse because of complications with posting cash when contract values fluctuate. That exemption is scheduled to end in June 2023.

The central bank says that while some funds already use cash, the majority of swaps are bilateral contracts that allow them to post bonds, for example. That could present problems when the new rules are in place.

“There can be good reasons” for funds to use derivatives, Rohde said. But they also need to keep in mind that the new rules will require them “to be able to put up large liquidity very fast. And every serious risk management would take that into account.”

Risk Warning

The industry has said the central clearing requirement, created to address systemic flaws revealed by the financial crisis, is a generally positive measure. But it is also warning it could inadvertently lead to new risks. Other avenues for getting cash, like the money markets, have frozen in the past, and trade association Insurance and Pension Denmark has urged authorities to address that risk.

Rohde said he wants the industry to start preparing now for the 2023 deadline, particularly as requirements for cash could increase drastically should interest rates rise from their record lows. Otherwise, pension funds risk falling into technical default.

According to an analysis by the central bank, the pension funds currently don’t have enough liquid deposits to meet variation margin calls, were interest rates to rise by just 100 basis points. Some funds will need to post collateral equal to 7 percent of their assets, according to the analysis.

Although such a sharp increase in rates is unlikely, Rohde said the industry can’t afford to “kick the can down the road.” The issue is not confined to Denmark. Pension funds in the U.K. and the Netherlands may find themselves in a similar position, according to Rohde.

“It is not a single pension fund that’s in trouble. It’s everybody,” Rohde said.

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