The Danish Consumer and Competition Authority said the current fee model used by the country’s commercial pension providers is preventing new players from asserting themselves in the market.
In its new report entitled “Pension Companies Earnings on Asset Management”, the watchdog said providers were making around 37% profit on the investment fees they charged scheme members, and used some of it to offer corporate clients insurance as a loss-leading sweetener – a practice which was stopping new providers getting a foothold.
The Danish Consumer and Competition Authority said in the report: “This cross-subsidy can make it difficult for new players to enter the market. It weakens competition in the commercial market for insurance and pensions, which is already relatively concentrated.”
Danish pension companies charged a very high price for investing Danes’ pension savings, the authority said in the report, though just less than two thirds of the amount savers paid – about 0.6% of their pension pots annually – actually went to activity linked to the investment of their pensions.
“At the commercial companies, the profit on this activity is on average around 37% of the amount savers pay,” the watchdog said.
This profit amounted to around DKK2.6bn (€349m), it said, with the amount the companies charged being about 60% higher than their actual costs of investment.
“This relatively high profit should be seen in the context of there being limited opportunity for deposit mobility, and that competition for deposits is relatively weak,” the report said.
Part of this high level of profit on investment was used by the commercial pension firms to set low prices on their insurance and administration in order to attract new corporate clients, the authority said, adding that prices for these services were often lower than the cost of producing them.
The watchdog also highlighted another problem with the contentious pricing structure, saying it had an element of redistribution of wealth from people with large pension pots – many of whom were pensioners – in favour of younger savers with smaller savings, who were able to benefit right from the start from the low prices for administration and insurance.
This new report from the Danish Consumer and Competition Authority is the result of additional work it said it would carry out a year ago, when it released proposals to make it easier to move pension savings from one provider to another, having found barriers to competition in the country’s non-statutory pensions market.