For nearly a decade now, a minor second pillar mandatory scheme has nestled alongside Denmark’s giant Labour Market Supplementary Pension Plan (ATP). But critics now say the scheme - the Særlig Pensionsopsparing (SP) - or Special Pension Saving Scheme, which lawmakers have repeatedly reshaped, should be ditched once and for all.
The SP, to which no Dane has contributed since 2004, is a retirement planning red herring, they say. Political to-ing and fro-ing over the future of contributions to the scheme this year have added to the exasperation.
Earlier in 2007, the Danish government said the mandatory payments into the SP of 1% of earnings would be reinstated in 2008. But, in his late-summer budget announcement, finance minister Thor Pedersen reversed this by saying the suspension of SP contributions would go on beyond January 1, 2008. At that time, the future of the scheme will be reviewed.
The Danish Insurance Association (Forsikring & Pension) said his decision did not go far enough. “The SP system should be abolished completely,” it said.
The association argued that the government was using the SP as a tax tool - making workers contribute to it only in periods when it wanted to dampen consumer spending - and this was the wrong way to go about delivering a pension scheme.
Per Bremer Rasmussen, administrative director of the Danish Insurance Association says: “A pension is a long-term investment that should ensure the individual Dane has a decent standard of living as a pensioner. Pension savings should take place in a stable framework, within which one can plan over many years.”
Søren Gade, executive director of the Danish Banking Association, agrees with the insurance association’s position on the SP.”It is wrong to use the pension system as a taxation instrument in economic policy,” he stresses.
Ole Block, director of consultancy SB Aktuar-Rådgivning, says Danes do regard the SP as a tax. However, the Finance Ministry insists the SP scheme is not a tax, but a pension scheme, where the eventual distributions are actuarially linked to individual contributions.
Jakob Hald, deputy permanent secretary at the Danish ministry of finance, concedes that until 2001, the SP was effectively a tax, but says the nature of the scheme was changed at that point from a tax to a saving scheme.
Currently, SP contributions are suspended until the end of 2008; at that time, the future of the scheme will be reviewed, he says.
Even if the reinstatement of contributions does have an effect on consumption, this is not as powerful as changing tax rates, according to Hald. “As for the short-term impact on economic activity, the savings nature of the SP scheme will likely imply a somewhat smaller effect - estimated to be about one half - on employment and growth compared to a tax change of a similar scale,” he says. But he notes that the exact magnitude of the outcome is uncertain.
Although less than a decade old, the shape of the SP has been chopped and changed several times in its short history.
The predecessor to the SP scheme - Den Midlertidige Pensionsopsparing (DMP) (temporary pension) - was introduced as part of second pillar pensions provision in 1998. The name shows the DMP was never intended to be a permanent pensions vehicle.
Under the terms of the DMP, employees and the self-employed had to pay one percent of their income into an account with ATP. The resulting amount, plus interest, was to be paid out at the age of 65.
A year later, a different mandatory scheme was introduced - the early version of today’s SP. Its name was less explicit, giving fewer clues as to whether it was expected to play a lasting role on the national pensions stage.
This 1999 version of the SP mandatory scheme was similar to the DMP - which continued to exist - except that there was an element of wealth redistribution. All SP contributions at that point were made into a single account, and benefits were to be given in proportion to the rate of employment, as gauged by the ATP contribution in the period.
Late in 2002, following the 2001 election victory by the Liberal (Venstre) party, led by the current prime minister Anders Fogh Rasmussen, the SP system was changed once more. This time to a new scheme where each individual paid into their own pension pot. In this way, the scheme reverted to a similar system used for the original DMP.
Then, in January 2003, all funds were transferred from the DMP into the SP, and the DMP subsequently abandoned. In 2004, mandatory contributions to the SP were suspended.
In 2005, SP scheme members began to have more choice about the way their savings were invested, and who managed them. They had the freedom to transfer their SP account to another bank or insurer - though the money still has to be managed separately, and cannot be merged with another pension plan.
ATP opened its electronic marketplace - Folkebørsen - which offered its SP clients a wide range of investment funds for their SP savings at low cost. There are now 164 funds available for ATP clients, ranging from ATP Invest Long Bonds and ABN AMRO Danmark to specialist funds such as Janus Capital Global Technology and Schroder ISF Japanese Equity. Funds investing solely in Chinese, Turkish or Latin American equities are among the most popular.
Clients can opt for one of three levels of control over their investments - “selvvalg” (self-choice), where they make their own decisions on investment funds; “medvalg” (assisted choice) where they decide on investment with the help of ATP’s analysis tools, and “ATPvalg” (ATP choice) under which they hand over decisions to ATP.
In practice, the vast majority of SP clients have chosen to leave it up to ATP. Of ATP’s three million SP clients, only 5,675 have gone for the “selvvalg” option, and just 251 have chosen “medvalg”.
But those who make their own investment choices have won higher returns. In 2006, those who used the Folkebørsen saw average returns of 23.3%, ATP reported. On average, those who left the management of their accounts to ATP made returns of 9.3%.
And despite being free to jump ship, since the beginning of 2005, only 200,000 Danes have moved their SP savings away from ATP. “Not many have done it because it’s a small amount,” says Ole Block.
At the end of 2006, the average deposit in the SP was DKK16,750 (€2,247). Total SP deposits managed by ATP are DKK52.3bn (€7.01bn).
After the changes to investment choice brought in, ATP has no further plans to alter the way the scheme is run. “We are not doing anything actively right now,” says Ellen Dalsgaard Zdravkovic, a director at ATP. “The interest is not very high, and given that the contributions are low, we have decided not to do anything actively to promote it.”
If mandatory contributions are not resumed - and many believe they will not be - many of the SP members could end up receiving a lump sum at retirement rather than a regular pension. According to the scheme’s rules, benefits are paid as a lump sum if their account holds less than DKK 15,000, instead of a 10-year payout if the pension is above that level.
Few involved in Danish pensions expect to see an early return to obligatory SP contributions. “I don’t think we will start paying for a number of years, at least,” says Block. What the politicians decide to do about contributions depends on the economic situation, he notes.
But given recent tax cuts, they are especially unlikely to be reinstated in the near future. “It would be rather confusing for the voters if they had already been given a tax reduction, so I don’t see any danger of this happening,” he remarks.
Gade sees no political will to reintroduce contributions; but neither does he expect the system to be completely abandoned. “Probably it will just stay where it is,” he predicts.