Method
The Council for Return Expectations sets the so called return expectations twice a year. These are used by pension companies and financial institutions to calculate pension projections and expected returns for the following calendar year.
The Council for Return Expectations sets the so-called return expectations twice a year. These are used by pension companies and financial institutions to calculate pension projections and expected returns for the following calendar year.
Return expectations reflect the Council’s assessment of how much the various investment assets—where Danes’ savings are invested—are expected to yield in the future. Savings are invested in many different asset types such as equities, bonds, real estate, infrastructure, etc.
Pension companies and financial institutions use these return expectations to calculate pension projections and expected investment returns for customers. The expected investment return is crucial for determining how much individuals will receive when they retire.
Pension projection
Every customer can view a pension projection from their pension provider. This projection shows how much they can expect to receive as a pensioner. The projection is based on the return expectations set by the Council for Return Expectations.
In addition, the projection depends on several other factors that are more individual or company-specific, such as investment allocations, life expectancy, starting capital, contributions, etc.
Investment product advice
When customers purchase an investment product or receive investment advice, they may be presented with expected returns—either for the product or as part of the advisory process. In financial institutions that use the Council’s return expectations, the expected returns for different investment products are calculated based on these assumptions.
Similarly, expected returns for investment products—like pension projections—also depend on other factors that are more individual or company-specific, such as investment costs, allocation, and invested capital. It can never be predicted with complete certainty how, for example, the investment return on pension savings will develop in the future. There is always uncertainty in the projection.
Therefore, the Council for Return Expectations not only sets expected returns but also expectations for investment risk. Risk is expressed using standard deviations and correlations. Pension companies use these assumptions to calculate the uncertainty in their projections.
Documentation of work
The Council documents its work in setting return expectations.
When the Council publishes new return expectations, it explains the changes compared to the previous update and the reasons behind them.
For each update, the Council describes its process for setting return expectations for the coming half-year. This is done in a memorandum outlining the Council’s considerations and the information gathered.
The Council has also prepared a memorandum describing how it sets long-term return assumptions. This document is updated as needed.