Risks related to interest rate fall further reduced

The Progress investment policy plan says that we reduce the interest rate risks when the interest rate reaches a certain level. This has the aim of maintaining the good financial situation and therefore maintaining a good chance of full pension increases (indexations).

How does the reduction of interest rate risks work?
As interest rate falls, ‘pension obligations’ increase; a pension fund must set aside more money for all current and future pension payments when the interest rate is low than when it is high.
This is similar to how a savings account works: when the interest rate is low, savers must deposit more money to achieve their savings target than when the interest rate is high.

An interest rate fall is therefore one of the risks for pension funds and their members. To provide a counterweight to this we conclude ‘derivatives’ contracts to generate money for us if the interest rate falls. If the interest rate falls, not only do the obligations increase, but – thanks to these derivatives – so too do the assets. In this way we limit the negative effect that an interest rate fall has on the financial situation.

Interest rate hedge increased three times
After a long period of interest rate falls, the interest rate began to rise in the second half of 2022. This was reason for Progress to increase the interest rate hedge. A new trigger point was reached in the spring of 2023 and we increased the hedge of the interest rate again. At the end of October 2023 the interest rate rose to more than 3% which – for the third time in a relatively short time – was reason for an increase in the hedge.

As a result, the interest rate hedge has risen in a few years’ time from 32.5% to 90% now. Consequently, this reduces the effect of an interest rate decrease on Progress’ coverage ratio.
 

 

 

April 2024