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

With average interest rate savings, the money is invested at a relatively low risk as we need to ensure the 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

With an average interest rate plan, you receive the interest rate that PFA fixes on an ongoing basis (the deposit interest rate), which is based on the average historical and expected returns seen over a number of years. In this way, the annual fluctuations in the actual return are evened out, and PFA’s investment return will therefore not directly influence the interest added to your savings. 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 plan.

 

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. You can read more in your terms and conditions of pension at My PFA.

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).

Average interest rate grouping

Average interest rate plans that include the possibility of an added 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 an average interest rate policy, it is placed in an interest rate group, a risk group and an expense group. Your policy may change groups.

 

Interest rate groups

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

Interest rate group 1: Policies with a weighted basic interest rate of 1.0 % and up to 2.0 %
Interest rate group 2: Policies with a weighted basic interest rate over 2.0 % and up to 3.0 %
Interest rate group 3: Policies with a weighted basic interest rate over 3.0 % but less than 4.0 %
Interest rate group 4: Policies with a weighted basic interest rate of 4.0 % and above.

The deposit interest rate for each interest rate group may differ as the investment policies for the groups’ total savings are subject to different requirements. Pension plans with the highest guaranteed benefits call for a very conservative investment policy. Policies 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 three risk groups, and each policy is placed in one of these groups:

Policies covered by an agreement on special experience profit or a so-called pooling agreement
Policies with regular risk calculation
Policies with group term life insurance.

Expense groups

PFA has three expense groups, and each policy is placed in one of these groups:

Policies in the payout phase as well as other policies without regular payments
Policies to which regular payments are made
Policies with group term life insurance.

 

Guaranteed benefits

With an average interest rate plan, you are guaranteed a minimum payout (guaranteed benefits) when you retire. 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 find at My PFA. If your circumstances change, we will fix a new minimum payout based on these changes.

Reduced risk with guaranteed benefits

The average interest rate environment and your guaranteed benefits mean 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 returns generated in the average interest rate environment are often lower than the returns 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 policies 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, the increase in life expectancy and the increased 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 agreed payouts

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

What does consolidation mean?

We consolidate the provisions by adding profit generated by the pension plan to the savings without increasing the minimum payouts. Any profit is a result of the actual development being more favourable than expected. As we use the savings to finance the minimum payouts, any profit results in a correspondingly higher degree of security that the savings will be able to finance the agreed payouts from the pension plan in future. Thus, consolidation helps ensure that the minimum payouts can be observed and financed by your savings.

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 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 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 at a historical low. At the same time, we live longer and the requirements for PFA’s capital stock have been tightened. This means that it is has become difficult to obtain a profit based on the original assumptions as we also need to set aside more money even to ensure your minimum payouts. Our main focus is to ensure you (at least) 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. However, right now 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 plans have gradually been adjusted downwards which implies that the newer plans, all things being equal, have better prospects of an increase in the payouts. However, we cannot provide any guarantees.  

Finally, since any increase of 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 plan was established. 

 

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

Do you have a plan without payments (a paid-up policy) in the average interest rate environment (PFA Traditional) as well as a 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
  • The possibility of a higher return since PFA Plus allows PFA greater investment freedom
  • The possibility of a transfer allowance in most cases
  • Fewer expenses as you only have to pay for the administration of one plan
  • A better overview which makes it easy to adjust and change your savings 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 transfer your savings from the average interest rate environment to a market rate plan, you will generally receive a transfer allowance in return for the guaranteed benefits that you give up. The transfer allowance  is a lump sum that will be transferred to your market rate plan. The allowance represents your share of the unallocated reserves, and it is calculated on the basis of the rules notified to the Danish Financial Supervisory Authority. For certain product types, a transfer allowance is not offered. Furthermore, limitations may apply to when a transfer allowance can be granted.

Check My PFA and contact us at (+45) 70 12 50 00

If you are considering transferring your average interest rate savings to a market rate plan, go to My PFA and check under Messages whether you have received a recommendation from PFA. If this is the case, you can effect the transfer online. If you have not received a recommendation from us and still want to transfer your savings, please contact us for advice concerning your options.