Rachel Fixsen speaks with one of the leaders of a new research centre that aims to keep Denmark as the leading pension provider 

A new academic pension research centre has been set up in Denmark, which has twice been lauded as having the world’s best pension system in the annual Melbourne Mercer global pension rankings. The Pension Research Centre (PeRCent) started in January at Copenhagen Business School (CBS), having secured DKK12.5m (€1.7m) in funding.

At a glance

  • PeRCent was launched in January with DKK12.5m (€1.7m) in funding over five years.
  • It believes strengthening of knowledge in pensions is best done independently of commercial interests.
  • Ideas for new projects seen to be coming from all sides of the pensions industry.

The centre has three leaders: CBS professors Carsten Sørensen, Svend Erik Hougaard Jensen and Jesper Rangvid. The idea was the brainwave of pension fund chief executives Paul Brüniche-Olsen of teachers’ pension fund Lærernes Pension and Torben Möger Pedersen of PensionDanmark. Both men have been appointed to the centre’s advisory board.

Brüniche-Olsen says there is a lack of academic research in pensions economics, which has had an negative impact on the level of debate in the sector. “We are facing a range of big challenges that we will have to solve in the next few years, and it is important decisions be made on a solid basis,” he says.

IPE asked Carsten Sørensen about PeRCent and its aspirations.

IPE: How do you see the institute developing?

Sørensen: The external funding is provided for five years, but we hope to deliver results so the Pension Research Centre will continue beyond this period. The results we aim at developing fall in three categories: research, teaching and mediation. 

IPE: How does it differ from other similar research institutes such as Netspar and The Pensions Institute at Cass Business School?

Sørensen: The basic idea and motivation behind establishing such centres is the importance and increasing attention pension savings and systems have for society. Compared with Netspar, though, we will not have open calls for projects, since the funding for data and research buyout is limited to our research fellows.

IPE: Does the pensions sector have a need for independent, academic research of this type?

Sørensen: The basic motivation for the pension sector in Denmark to fund the initiative, as I understand it, is to strengthen research and knowledge on pensions. The strengthening of research is done best by having research done independently, in the sense that conclusions and results are not influenced by commercial interests. On the other hand, research should hopefully also be relevant and not done independent of real-world problems, issues and considerations. The centre construction tries to find a good balance between these two aspects.

IPE: And why does the pension sector in Denmark have such a need? 

Sørensen: The basic motivation was firstly to have a centre of knowledge if, for example, issues were discussed in the media; secondly, have increased focus on pension savings in society as a whole; and thirdly, keep the high ranking of the Danish pension system. In regards to the third point, the Danish pension system usually comes out very well in international rankings. The pension industry in Denmark would like to stay high in those rankings and have the public in Denmark be aware of this.

Current projects at PeRCent

Forecasting Stock Returns for Long-term Investors
Participants: Jesper Rangvid
This project is to review the academic literature that studies the extent to which expected stock returns fluctuate over the business cycle. Using a practical approach, the paper will document how different variables provide in-sample and out-of-sample information about expected returns across countries, time periods and horizons. It will link this forecast ability of stock returns to economic theories that explain time variation in expected returns. 

House or Stocks? Life-Cycle Investment and Consumption Revisited
Participants: Holger Kraft, Claus Munk and Farina Weiss
Researchers will formulate and estimate a model of the dynamics of stock prices, house prices and labour income, with time-varying expected growth rates that can be correlated with the levels of these variables. Among other things, they aim to investigate whether their model can explain the observed low investment of young individuals in stocks, and the extent to which a housing investment can replace a stock investment. 

Household Bargaining and Optimal Pension Schemes
Participants: Jimmy Martinez-Correa and Mauricio Prado
The project aims to study how optimal pension schemes vary depending on household characteristics, and how they interact with risk-sharing possibilities within the household. While traditional economic analysis assumes households are co-ordinated units, researchers say empirical evidence and the modern theory of household economics show that many households are complex entities, with a division of bargaining power among members.  

How Do Households Prepare for Retirement? A Life-Cycle Model of Consumption, Savings and Investment Choices Using Register Data
Participants: Marco Angrisani and Arna Vardardottir
The gradual shift from defined benefit to defined contribution private pension plans has put more investment responsibility on households. As a result, retirement-income security hinges as much on sound portfolio allocation strategies as on the level of accumulated wealth. The project aims to understand how households use the available financial products to attain their objectives, how they react to changes in the availability and generosity of welfare programmes, and respond to shocks to disposable income and expected retirement wealth.

IPE: What are the institute’s objectives for research output?

Sørensen: The objective is to deliver journal articles of high quality and have the work published in internationally recognised journals in economics and finance or, if relevant only in a Danish context, in relevant Danish journals – Nationaløkonomisk Tidsskrift and Finans/Invest.

IPE: Where will ideas for research projects originate – from the academic side or from other partners?

Sørensen: Our hope is that many of the ideas for research projects will be prompted by the interaction we aim at having with the pension sector and, in particular, as a result of the discussions we have within our advisory board where our sponsors are represented. It does not matter much where the idea is prompted, as long as it is a good idea.

IPE: Do you see examples in other countries of pensions research organisations that work well? 

Sørensen: My impression is that Netspar, the research institute at Cass Business School and Rotman ICPM in Canada all work well. However, in the construction of the centre we looked more at how other research centres in Denmark were set up, within the regulation of the Danish university system. 

IPE: How is the Danish pensions system different from those in other countries, and does this mean it needs its own specific research?

Sørensen: The Danish pension system differs from systems in other countries by the specific way public pension and social security benefits interact with private pension savings. Furthermore, in several decades, roughly all private and occupational pension programmes have in fact been mandatory and of the defined contribution type. This means most private pensions in Denmark are funded, in contrast to many other countries where this funding is a problem.