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IPE special report May 2018

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Danish pensions commission created to tackle disincentives

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Denmark is to create a commission studying the country’s pension system to find solutions for complex rules and high taxation of pensions, the Ministry for Taxation has announced.

The commission will be chaired by Torben Andersen, professor of economics at the University of Aarhus.

Morten Østergaard, the minister for taxation, said: “Now we want to let a number of experts look at the system in detail, so we can get ideas for a more transparent pension system, which is attractive for everyone to save for retirement.”

Last month, Østergaard revealed he was open to the idea of setting up a commission.

Today, Østergaard said the system in Denmark was generally good, but still resulted in ordinary families being hit by an effective marginal tax on pension savings.

This is much higher in some cases than the rate they paid on their income, he said.

Østergaard said there had to be security for pensioners who had the least, and added that the tax-financed public pension and labour-market pensions had to remain the basis for Danish pensions.

He said the desire and ability of people to make pension savings should not be discouraged by the complexity of pension rules.

“There are no easy solutions, and a thorough piece of analysis will be required to create a viable solution,” he said.

“We should not throw ourselves into changes without a full and clear picture of the consequences.”

The ministry said the pension commission’s work should involve key stakeholders and organisations, and will report to the government by Autumn 2016.

Pensions and insurance industry association Forsikring & Pension (F&P) welcomed the decision to establish the commission and said it was important that it looked at the offsetting rules for public benefits, since this destroyed the incentive to save for retirement.

But it said the real problem was that pensions were by far the most heavily taxed type of savings in Denmark. 

A year before retirement, pension savings were taxed at more than 170% and still at well over 100% five years before retirement, F&P said.

Per Bremer Rasmussen, chief executive of the association, said: “For a broad group of citizens, it cannot pay to save when they get close to retirement.”

According to Bremer Rasmussen, it paid to stop making pension payments and take an early exit from the labour market for some Danish citizens, adding that both of these actions were contrary to the government’s stated aims.

He said it was not occupational pensions and individual pensions that made things complicated and destroyed incentives to save, but rather the rules for public pension contributions.

“Therefore, we need to look at offsetting rules in the public system,” Bremer Rasmussen said, acknowledging that solutions were not simple.

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