The high effective rate of tax on pension savings in Denmark, arising because public pensions are means-tested, is one of the pension system’s biggest problems and must be addressed, according to the head of the Danish Pensions Commission.

The new Danish centre-right government, which took office in June following the general election, said a week ago that the Pensions Commission, set up under the Social-Democrat-led government in 2014, would now be disbanded.

Explaining the move, the incoming minister for taxation Karsten Lauritzen said the commission had been set up by the previous government, and that the new government now had different objectives and time-scales.

Torben Andersen, chairman of the commission and professor in the department of economics and business at Aarhus University, told IPE: “One of the big issues in the Danish system is the high effective tax rates of pension savings, for low and medium-income households, due to the means-testing of public pensions.

“This may have detrimental effects on savings and retirement incentives, and it is therefore important to address this issue.”

He also cited differential taxation of different types of savings, as well as the complicated rules surrounding pension saving.

“The only issue the government wants to pursue is the so-called residual group, that is, those who do not – or only to a very small degree – save for pensions,” he said.

He pointed out that the whole idea of the commission when it was set up was to take a thorough look at the entire pension system. 

“This is important since the system is maturing, and since there have been a number of policy changes in other areas, or with other purposes, which have affected pension savings,” he said. 

Andersen said the commission’s main task was to come up with possible solutions to problems in the Danish pension system.

Now that the body was being abolished, this would not happen, he argued.

However, he said that not all the work the commission had so far done had been wasted.

“The commission has produced a first small report highlighting the pros and cons of the Danish pension system, and has prepared a number of analyses on how the system will develop as it matures, with more and more people set to retire with a decent labour market pension,” he said.