Institutions for occupational retirement provision (IORPs) are pension foundations or funds providing supplementary pension benefits promised by an employer. They are regulated by the Pension Funds Act and the Public Insurance Funds Act which have gone through a range of changes since the Directive (EU) 2016/2341 of the European Parliament and of the Council came into force at the beginning of 2019. One important change has been new regulation concerning the choice of the maximum rate of interest allowed for discounting pensionliabilities.
The pension foundation or fund chooses the interest rate but in practice the actuary of the foundation or fund will give it a suggestion. The appropriate discount rate has been discussed among various experts for decades. There is no simple rule, and the approach can vary depending on the country or nature of the pension plan or the use of the valuation.
However, there are at least four factors in addition to prudency to be considered when determining the appropriate discount rate for an IORP: return and risk of investments, duration of investments, characteristics of the insurance portfolio and buffers such as indexation reserve and assets exceeding the pension liabilities. These factors are discussed in more detail in this work. This work proposes that the most important factors are return and risk of investments and buffers. Duration of investments and characteristics of the insurance portfolio only have a slight impact for IORPs in Finland. Their effects can be seen through return and risk of investments since they mainly affect investment activities. However, instead of single factors, it is important to see the big picture. Despite the common regulation, all IORPs are unique and there might be some other IORP-specific factors affecting the appropriate level of interest rate.