Danish pension funds.


Danish Harbour

Frances Schwartzkopff and Christian Wienberg of Bloomberg, ran an article today titledDenmark To Ease Pension Rules To Reduce Liability Burden

From what I’ve seen the discount rate will be raised to 5%. This means that if you have an obligation to pay out f.i. 1 million DKK annually over the next 30 years you need a fortune of 15.4 million DKK today to meet that obligation at a 5% rate of discount. If you only have a discount rate of 4% you would need a sum of 17.3 million today.

This is creative bookkeeping.

At the present time the interest rate on a 30 year real estate fixed rate mortgage bond is 3½%. But the discount rate assumed a yield of 5% – that means that  – at best – the 15.4 million will not be able to pay out 1 million annually, but only .833 million. (Forget about inflation it is bad enough as it is – there could come a vicious deflation, so never mind that.) There are however some totally predictable further factors:

1)      The 30 year real estate bond was chosen to get a security of maturity matching the obligation. In practice the yield never reach the 3½% because the bonds are convertible, which means in case of a rise in interest the debtor can buy back the bond and get a new loan with the higher current interest rate. The annual payments from the debtor are – by and large – same; but his debt is reduced. If interest rate drops then the debtor can convert into a new loan with same debt and lower interest rate.

In the long run – and we are talking 30 years – the average yield is significantly lower – the one year variable interest loan is 1/3% (which is perverse) so let’s assume 1%. The spread will be lower for higher interest rates, as we are not talking linear functions but exponential.

Thus the average annual yield will be about 1%.

2)      The average life expectancy of a real estate mortgage bond is nowhere near 30 years, as they will be converted before that time. Interest rates either go up or they go down – both are to the benefit of the debtor. But this advantage to the debtor has been priced in when the pension fund buys the bond. With a 30 year mortgage you would expect 2 conversions in that time period.

3)      Depending upon which type of pension you are talking the asset of a 30 year real estate mortgage bond is perfect, as people die more or less at the rate of repayment. Well that is: They did. As in most countries people in Denmark live longer than their parents.

4)      There is a distinct shortage of real estate mortgage bonds in the 10-20 year band. This is due to the fact that insolvent homeowners have converted to variable interest mortgages which – as mentioned – only yields 1/3% annually. This is due to the de facto state of bankruptcy of the banks and their mortgage banks. We are talking interest rates of loans in distress. The 5 year sovereign bond is about the same 1/3%.

If a debtor is smart and solvent – yes, some are both – they will convert into the 15-20 year which has a coupon of 2½-3%. These bonds will be quite expensive, as there is a shortage of them.

But turn it whichever way you want: The pension funds will not be able to meet their obligations. The bookkeeping trick of upping the discount rate only postpones the problem. The matter is so much the worse as the trick was used late in 2008. The only possible result is that the pension payouts will have to be reduced, as some pension funds have already done. The bank inspection freely admitted that these pension funds were in flagrant violation of their contractual commitments – and the pension savers were in their perfect right to sue – and would probably win in court. The only problem was: By hook or crook the money wasn’t there, so the fund would have to go into bankruptcy – which would reduce the payments to the pensioners – the hard way: By default.

The largest pension fund, ATP, has been so smart as to never promise anything. The result is that ATP have not ventured into reckless speculation to fool themselves into believing that the nominal high return on speculative investments in the long term would yield more than a sovereign bond.

Connected to this story is this about Danske Bank:


There are “rumors” circulating that Danske Bank is planning to sell their pension investment branch Danica Pension with 600.000 pension savers. (No, I cashed in my modest savings there – paid my taxes –and deposited the money in another bank. I’m not a complete idiot!).

The question is selling to whom? The article mentions Swedish SEB (SEB has already folded 20 years ago and has Swedish government ownership – so why not see if they are prepared to die again?). There are some complications:

1)      As the other pension funds are hardly able to conceal their bankruptcy – Danske Bank with their notoriously incompetent management is not likely to be in a better shape than the rank amateurs of the trade union controlled pension funds.

2)      Considering the inability of Realkredit Danmark (Danske Bank’s mortgage bank) to sell their variable interest real estate bonds – one wonders who actually bought them. Perhaps Danica Pension is stuffed to the gills with Realkredit Danmark junk bonds?

In case of a sale these bonds would lack a buyer – the flexible interest bonds are auctioned annually.

3)      Perhaps – and only perhaps – this “rumor” is due to an inconvenient possibility: The pension savers might sue Danske Bank for reneging on their guarantees to the pension savers? Perhaps the quotation marks cover resounding roars of laughter from the investors sought out. How would a buyer be protected against virtually unlimited lawsuits?

No the case is with some likelihood that Danske Bank has been ordered to get rid of this nursing of their own dubious issues. You can say about incest what you want; but it stays in the family!

With at CB bank guarantee for the 3 year loan in the ECB of 41 billion DKK the continued possession of Danica Pension as an Instrument of Darkness will have a hard time avoid being construed as speculation against the Danish currency – something “Uncle Nils” (CEO of Danish CB) is known to take a very dim view of indeed. The Danish krone is under massive pressure to revaluate. With the Danish CB presumably selling sovereign bonds by the billions to stabilize the currency the last thing the CB needs is somebody buying DKK denominated “securities” – pressing the Danish interest rates even further (below the comparative German) – and with the CB’s own money! A scant 250 years ago you chopped people’s head off in a very public place in Copenhagen for such actions. If you remember Hans Christian Andersen’s fairy tale about the soldier and the big dogs – yup, that’s the goal and the square!