PFA Traditional

Average interest rate savings

PFA Traditional

Average interest rate savings

With average interest rate savings in PFA Traditional, your pension plan generates a steady return, and you are guaranteed a minimum payout (guaranteed benefits) when you retire. The risk is limited and so is the potential for a high return.

Average interest rate in brief

Low risk in the average interest rate environment

With average interest rate savings, the money is invested at a relatively low risk as we need to ensure a guaranteed minimum payout. The majority of your savings are invested in bonds, and only a small part is invested in shares. However, the share ratio may vary depending on which interest rate group you have been placed in.

Addition of interest in the average interest rate environment

With an average interest rate plan, you will receive an interest rate on your deposit which is fixed by PFA on an ongoing basis. The deposit interest rate reflects the average historical and expected return seen over a number of years. This way, the annual fluctuations in the actual return are reduced. Therefore, PFA’s return on investment in a given year will not directly influence the return that you receive on your pension plan in the year in question. The deposit interest rate is reported to the Danish Financial Supervisory Authority, and it is fixed once a year as a minimum. Regardless of the deposit interest rate, you will always, as a minimum, receive the guaranteed minimum payout (guaranteed benefits) for your pension plan.
 
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No influence on investments

PFA fixes the deposit interest rate, and you do not have any influence on the investment selection. For instance, this means that you cannot adjust the investments to match your age and risk appetite.

Bonus

Most average interest rate plans include the possibility of an added bonus that may increase the agreed minimum payouts. It will be stated in your policy if this possibility applies to your plan. Special rules apply to your pension plan if your policy does not mention the possibility of bonus.

Interest rate groups

Your average interest savings are placed in one out of four interest rate groups. Your interest rate group depends on your minimum payout (guaranteed benefits).
 

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Environmentally sustainable investments

The investments underlying this financial product do not consider the EU criteria for environmentally sustainable economic activities. 

Categorisation in accordance with the EU regulation on sustainability-related disclosures

Average interest rate does not promote environmental or social characteristics and does not have sustainability as its objective.

Average interest rate grouping

Average interest rate plans that include the possibility of a bonus are divided into different groups (contribution groups) based on rules fixed by the Danish Financial Supervisory Authority.

These rules apply to all Danish pension companies and establish in detail how the companies should distribute their results (interest rates and expenses) in a fair and reasonable manner.

If you have a pension plan in average interest rate, it is placed in an interest rate group, a risk group and a cost group. Your policy may change groups. As of 1 July 2023, your pension plan can no longer change interest rate group.

 

Interest rate groups

PFA has four interest rate groups, and each pension plan is placed in one of these groups. Placement in the interest rate groups is based on a calculation of the pension plan's weighted basic interest rate, which is an expression of the size of the guaranteed benefits relative to the savings.

Interest rate group 1: Pension plans with a weighted basic interest rate from 1.0 % and up to 2.0 % 
Interest rate group 2: Pension plans with a weighted basic interest rate over 2.0 % and up to 3.0 % 
Interest rate group 3: Pension plans with a weighted basic interest rate over 3.0 % but below 4.0 % 
Interest rate group 4: Pension plans with a weighted basic interest rate of 4.0 % and higher

As of 1 July 2023, pension plans can no longer change interest rate group. This means that from that date, each pension plan will remain in the interest rate group it belonged to as at 1 July 2023, regardless of whether the pension plan’s weighted basic rate of interest will be subject to later changes.

The deposit interest rate for each interest rate group may differ as the investment policies for the group’s total savings are subject to different requirements. Pension plans with the highest guaranteed benefits call for a very conservative investment policy. Pension plans with group term life insurance are not placed in an interest rate group as group term life insurance plans do not include savings.

Risk groups

PFA has two risk groups, and each pension plan is placed in one of these groups:

Pension plan covered by an agreement on special local experience rating or a so-called pooling arrangement 
Pension plans based on ordinary risk calculation 

Cost groups in the average interest rate environment

PFA has two cost groups, and each pension plan is placed in one of these groups:

Pension plans that are paid out as well as other pension plans without regular payments
Pension plans with regular payments


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Guaranteed benefits

With an average interest rate plan, you are guaranteed a minimum payout when you retire. This is called guaranteed benefits. The guaranteed benefits are calculated based on cautious assumptions about life expectancy, risk of reduced occupational capacity, expenses and return. The minimum payout is guaranteed provided that you meet the conditions of the pension plan in terms of payments, employment, etc. The rules are described in detail in your policy, which you can find on My PFA. If your circumstances change, we will fix a new guaranteed benefits based on these changes.

Reduced risk with guaranteed benefits

Average interest rate and guaranteed benefits ensure a significant reduction in risk. PFA has to invest the savings very conservatively in order to honour the guaranteed benefits and ensure a steady return. This means that the return generated in the average interest rate environment often is lower than the return generated in the market rate environment, which allows greater fluctuations and does not have any guaranteed benefits.

The reserves help secure your payouts

PFA has to accumulate reserves to secure the guaranteed benefits in case the development in life expectancy, the risk of reduced occupational capacity, expenses and return behaves differently than expected. The reserves are accumulated by setting aside part of the investment profit etc. during good years. Any reserve surplus will be distributed to the pension plans in the form of a bonus. However, right now there are no indications that the deposit interest rate or the pension payouts will increase as the low level of interest rates, long life expectancy and the high capital requirement mean that we need to set aside even more money in order to secure the guaranteed benefits.

Consolidation

Consolidation provides greater security for the minimum payouts

Over a number of years, PFA Pension has upped the security for the pension payouts by consolidating the savings on the individual customers’ pension plans.

What does consolidation mean?

When we consolidate the savings, this means that ongoing profit is credited to the savings without increasing the minimum benefits (the so-called tariff benefits). Profit arises when the interest credited to the savings is higher than the assumed interest rate, when the cost of insurance cover is lower than assumed and when costs are lower than assumed. The increased crediting to the savings when there is profit provides greater assurance that, going forward, the savings will be able to finance the minimum payouts under the pension plan, even if a deficit arises later. Thus, consolidation helps ensure that the minimum payouts can be observed and financed by your savings. If the savings reach a level where they can, with a high degree of certainty, finance the minimum benefits, there will no longer be any need for consolidation. This means that ongoing profit can then be used to increase the minimum benefit.

Why the forecasts and payouts are not increasing

 

Why the forecasts and payouts are not increasing

Generally, when you are saving up in the average interest rate environment your pension plan comes with some minimum payouts, the so-called tariff payouts also known as guaranteed benefits. A certain average minimum interest on your pension payments is included in the tariff payouts together with assumptions regarding life expectancy, costs and payment of insurance cover. For the tariff payouts to increase, the actual development must be better than the assumed. And, at the same time it must be secure to increase the payouts. 

The development proved less favourable than assumed 
The assumptions that form the basis of a major part of the average interest rate pension plans – especially older plans – turned out to disappoint. Among other things, the assumptions include life expectancy and interest rate expectations. 

Today, the interest rates are low. At the same time, we live longer and the requirements for PFA’s capital stock have been tightened. This means that it has become difficult to obtain a profit based on the original assumptions as we need to set aside more money even to ensure your minimum payouts. Our main focus is to ensure you (as a minimum) the payouts you have been promised and which you can confidently rely on.

Does this mean that my payouts cannot increase?
No, they can if PFA over several years generates a larger investment return than what is necessary to ensure the minimum payouts that we have agreed with you and PFA's other customers holding average interest rate plans, and provided that we see a chance of decent future returns or the assumptions in some other way change in a favourable direction. At the moment there are no indications that the pension payouts will increase. 

However, this will depend on the specific assumptions applying to your plan. Over the last 20 to 30 years, the assumptions applying to new pension plans have gradually been adjusted downwards which implies that the newer pension plans, all things being equal, have better prospects of an increase in the payouts. However, we cannot provide any guarantees.  

Finally, since any increase in payouts must be secure, please note that the calculation of payouts will typically be based on more conservative assumptions than the assumptions applied when the pension plan was established.

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Is it a good idea to collect your savings in PFA Plus?

Do you have a pension plan without payments (a paid-up policy) in the average interest rate environment (PFA Traditional) as well as a pension plan in the market rate environment (PFA Plus) which you are making regular payments to? Then, it may be worth considering transferring all of your savings to your market rate plan.

Pros

  • You have the potential for higher returns because your savings are invested with a higher level of risk in market-rate products (PFA Plus)
  • You may be eligible for transfer allowance
  • Fewer expenses as you only have to pay for the administration of one pension plan
  • You get a better overview which makes it easy to adjust and change your pension plan.

Cons

Just like transferring your savings to PFA Plus includes a number of advantages, there are also disadvantages.

  • In particular, you need to be aware that your savings no longer will be covered by the special guaranteed benefits that ensure you a minimum payout from your average interest rate plan.
  • Therefore, you bear the investment risk in PFA Plus, where no guaranteed benefits exist.
  • On transfer of temporary and lifelong life pensions (annuities) to PFA Plus, you will also bear the risk of an increase in the average life expectancy in excess of PFA’s expectations. This means that the payouts from your life pension will change as PFA’s expectations to average life expectancy changes. Payouts from your life pension in the average interest rate environment will not decrease even if average life expectancy changes.

Transfer allowance

If you move your savings from average interest rate to market rate, you may as a rule be entitled to a transfer allowance The allowance takes into account that, following the transfer, no guaranteed benefits are attached to your savings and that you no longer have a pension plan with collective reserves attached.

The transfer allowance is a lump sum that is transferred to your market-rate savings. The allowance is calculated on the basis of rules reported to the Danish Financial Supervisory Authority and reflects, together with your savings, the total financial value of your pension plan in average interest rate environment. For certain product types, no transfer allowance is granted and there may be restrictions as to when an allowance can be obtained.

Check My PFA or call us at (+45) 70 12 50 00

If you are considering transferring your savings from average interest rate to market rate, go to My PFA and check whether you have received an offer to combine your savings. If this is the case, you can approve the transfer electronically immediately. If you do not have an offer from us but still wish to transfer your savings, please contact us so that we can review your options together.

Call (+45) 70 12 50 00