DENMARK - The Danish pensions industry could see some of its tax advantages cut if the government accepts a recommendation by the country's Competition Commission.
The commission's annual report on competition in Denmark was highly critical of the Danish pensions industry, arguing competition is hampered at present by a lack of transparency over charges as well as a host of other factors.
"In an analysis of findings, the Competition Commission states "a number of initiatives should be launched to ensure greater transparency and more effective competition in the administration of pensions".
One of its recommendations it has made is the government should consider the options for cutting the tax subsidy on pensions administration, in connection with wider tax reform.
"Pension administration costs are tax-deductible to up to 59% of costs, which is more than for other financial contributions," it said.
"By doing this, the state subsidises the administration costs of pensions. This reduces pensions institutions' economic incentive to keep administration costs low."
More generally, the commission said there are a whole range of conditions on both supply and demand sides of the pensions market which conspire to limit competition in the pensions administration market, but which it admitted might be hard to alter.
"Some of this has to do with the structural and institutional relationship to the market, under which pension schemes are often relatively complex products," continued the Commission in its report.
"Furthermore, mobility is significantly restricted by the fact that the majority of pension schemes are labour market pensions, which are agreed by collective bargaining and cannot be moved individually.
"Finally, it cannot be ruled out that public regulation - capital requirements, for example - constitutes a barrier to access," it said.
As things stand, it is very hard for Danes to see exactly what was going on with their pension, according to the commission.
"In the last four years, the pensions industry has been highlighted in the National Consumer Agency's annual report as the one of the least transparent sectors," it said.
Acknowledging the recent initiative by the Danish Insurance Association (Forsikring & Pension) to improve this, officials added: "It is important for F&P's initiative to be supplemented with information which makes it possible for customers to compare costs and performance between pensions institutions", acknowledging administration costs varied widely between schemes.
"The difference between the five cheapest and five most expensive institutions is on average DKK900 (€120.67) a year. For a pensions customer, that means a difference over 40 years of about DKK68,000 in terms of pension capital," said the Commission.
"The marked differences in cost levels must be seen as a sign that competition between institutions in the administration of pensions is not effective. If competition were effective, those institutions with high costs would find it hard to get by."
Officials from the Commission claimed there are economies of scale to be had in pensions administration because of the high start-up costs of IT systems, for example. But many small labour-market pension institutions were not large enough to take advantage of these savings.
"It is likely that customers of pensions institutions with high administrative costs would only be able to get cheaper administration if they let others administer the pensions or if the institutions merged," it said.
The commission also recommended institutions should offer with-profits pensions which include a significant element of individual reserves - still a key product in Denmark - which is portable when customers transfer their assets. It noted some institutions had already introduced this practice or were in the process of doing so.
"Today, pension customers do not have the right to a proportion of the collective reserves in with-profits pensions, if they want to switch institution," it pointed out. "This can inhibit mobility and is therefore anti-competitive."
In response to the statement, Forsikring & Pension said it supported the commission's recommendations, though it added, to a large extent, they were things the industry was already doing.
However, officials strongly argue the commission's conclusion - suggesting competition was fundamentally poor in the pensions industry - was wrong.
"We have effective competition between pensions in Denmark," said Per Bremer Rasmussen, managing director of F&P.
"If there was bad competition, then we would only have a few dominant pension companies with big earnings, artificially high wages and very few products on the shelves. But it is not like that, it is the opposite," he added.
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