25 year olds would have to contribute double to get today's pensions – ATP
DENMARK - Historically low interest rates and rising longevity mean 25 year olds in Denmark will have contribute double the amount today’s pensioners had to save to get the same pension, according to a study by ATP.
Chresten Dengsøe, actuarial director at the Danish pension fund, said: “It will certainly be a surprise to most people, that you have to save twice as much if the real interest rate is 2% instead of 4%.
“But this is how it actually is. The interest rate level is decisive for asset growth, when savings take place over many years.”
The figures, which take account of inflation, show that a 65 year old would have to have saved DKK1,500 (€200) a month in today’s terms over a 40-year working life to collect a monthly pension of DKK10,000.
To receive the same monthly pension according to today’s prices, someone who is 25 now would have to contribute DKK2,950 a month.
ATP’s 65-year-old members received an interest rate of, on average, 4 percentage points above inflation. But current interest rates are 2.25 percentage points over inflation, Dengsøe said.
Interest rate hedging by pension funds meant scheme members who had already made all or most of their contributions would be largely unaffected by current low interest rates, ATP said.
In ATP, a large proportion of contributions are secured at the current interest rate for the rest of the saver’s life, Dengsøe explained.
Rising longevity plays a smaller part in the difference in required contributions.
ATP said someone of 25 today is expected to live four years longer in retirement than today’s retirees. These added years translate into DKK400 a month in extra contributions.