Diskonteringsrentekurven i den danske pensionssektor

Frederik Raahauge Weber

Student thesis: Master thesis


This thesis deals with the Danish discount curve, used to value pension liabilities. The current dis-count curve was introduced in the spring of 2012 when market interest rates were low and therefore putting a pressure on the solvency of Danish pension funds. The new Danish discount curve is simi-lar to the one proposed in the European Solvency II regime. The introduction was however not made to comply with Solvency II, but to help the pension funds in solvency problems. The new Danish discount curve is based on the Smith-Wilson technique from year 20 and forward with a 10 years extrapolation to the “ultimate forward rate” at 4.2 %. The analysis of the Smith-Wilson discount curve in this thesis shows that the curve is different from the market interest rate curve in terms of risks, especially key rate duration. The market interest rate curve, e.g. the Euro swap rate curve, has an interest rate exposure throughout the entire curve where the Smith-Wilson curve only has exposure to year 20. The Smith-Wilson technique also creates an interest rate risk around year 15 meaning that the value of the liabilities will increase when rates go up, which does not make sense from an economic point of view. Further a back-test analysis of a historical hedge shows that it is difficult to hedge the regulatory interest rate risk, due to the form of the discount curve. The analysis further shows it is easier to hedge the economic risk, based on investable market rates, compared with the regulatory risk. The difference between the Smith-Wilson discount curve and market interest rate curve means that Dan-ish pension funds need to choose which curve they will use in their risk management, since eco-nomic and regulatory risk cannot be hedged at the same time. The pension funds will always be able to pay their liabilities if the economic risk is hedged but the Smith-Wilson discount curve means that the pension funds will have an incitement to only hedge the regulatory risk, as this is putting less pressure on the solvency ratio, and improve the ability to create high returns if the interest rates goes up during the coming years. An analysis of the Danish pension funds’ use of the discount rate in their risk management shows, that there are a tendency to use the Smith-Wilson discount rate in the risk management to put less pressure on the solvency. Especially pension funds with high interest rate guarantees and commercial pension funds, which are facing high competition, use the Smith-Wilson discount curve more frequently. The risk in the Danish pension industry, however, seems limited even though several pension funds do not hedge the economic risk, as the Danish FSA and the pension funds have focus on the difference between the market and regulatory rate in their risk management.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2014
Number of pages101