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Denmark’s PenSam Fund Unwinds Rate Swap on Discount Rule Change

June 22, 2012

PenSam, a pension fund for Danish health-care workers, unwound 3 billion euros ($3.7 billion) in 30-year interest rate swap hedges after the Nordic country last week eased rules for setting discount rates.

The government said June 12 it would no longer require mark-to-market discount rates for longer-dated liabilities after falling Danish bond yields increased the cost of guarantees life insurers and pension funds offered to policyholders. Danish yields had plunged because the AAA-rated country emerged as a haven amid a deepening European debt crisis.

“We removed all our exposure to 30-year rates and moved down to 20 year, maximum,” PenSam Chief Investment Officer Benny Andersen said in an interview this week. “We were hedging 14 billion to 15 billion euros of assets under management, and we removed close to 3 billion euros of 30-year swaps.”

The move to a higher fixed rate reduces liabilities and removes the benefits of longer-dated rate derivative hedges held by pension funds to protect against falling rates. The yield on Denmark’s bond due in 2039 soared 28 basis points to 2.08 percent after the announcement and the 30-year euro swap rate surged 34 basis points to 2.29 percent from June 11 to June 14.

More Coming

The euro swap curve will still be required for calculating liabilities up to 20 years, according to a note published on the government’s website. Liabilities of 30 years or longer will be discounted at a fixed “ultimate forward rate” of 4.2 percent, with a transition period in between.

In an interest swap, funds and traders agree to exchange fixed and floating rate payments based on a notional amount.

Other Danish pension funds may also unwind hedges. Danica Pension, a unit of Danske Bank A/S (DANSKE) with 36 billion euros of liabilities, bought about 18 billion euros in notional interest rate derivatives last year, according to its annual report.

“We don’t comment on specific trades, but obviously there’s less need for hedging the low guarantees,” Danske Bank’s Chief Financial Officer Henrik Ramlau-Hansen said in an interview. “It’s the 20-year rate that now determines the hedging requirement”.

Denmark, a European Union member, has opted out of the euro and has pegged its krone to the 17-nation currency.

To contact the reports responsible for this story: Nicholas Dunbar in London at

To contact the editor responsible for this story: Jonas Bergman at

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