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Danish budget tough on pensions

Danish employees will have to pay an extra annual 1-2% of their salaries to sustain their present pension savings level, following budget legislation passed by the Danish government on 26 June.

The increase comes after changes in tax on insurance company and pension fund investment, which alter the previous variable 'real' interest rate tax, calculated on company bond yields and standing currently at an average of 35%, to a fixed rate of 26% on the annual bond interest gained.

This reform, to be implemented in the year 2000 follows hot on the heels of legislation passed on 2 June placing a 5% tax on investment in shares.

Together the changes mean that an employee on an average Danish salary of Dkr250,000 ($36,764) per annum will now receive a retirement lump sum before tax of Dkr3.34m compared to Dkr 3.7m previously, according to figures from Danica Insurance. This constitutes a 0.5% reduction in value and as such will require the extra payment by employees to compensate for the fall.

The new reforms do however raise the ceiling on equity investment from 40% to 50%, and according to Carsten Schmidt, managing director at Mercer Bonner consultants in Denmark, fund managers will seize the opportunity to increase share allocation, with tax rates still significantly more attractive than for bonds.

Although the budget reform will not directly change the current level of 20% which funds can invest overseas, the implementation of the Euro is set to have a great impact on Danish foreign asset allocation.

At present, funds can invest a further 50% of their assets in ECU, a figure which will transfer to euros next year. As a result, Danish funds could be obliged to hold only 30% of their portfolios in domestic assets. Niels Fink, head of investment at PensionSelskaberne, a Danish 'umbrella' company managing a mixture of seven pension and life assurance funds, says he fully expects Danish funds to take this increased investment opportunity in foreign markets. The chance to invest heavily in the euro fixed income market for example will certainly not be turned down," he says. Hugh Wheelan"

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