Some 1,600 years ago St Augustine of Hippo prayed for chastity and continence, “but not right now”. It is a sentiment that finds a loud echo in the Danish pensions universe today.
“There is a general consensus in Danish politics that the pension system is fundamentally sound,” notes Anne Seiersen, head of the occupational pensions department at the Danish Insurance Association, the ForsikringensHus. “We have a quite good mix of the three pillars, we have a large degree of funding of the second and third pillars so I don’t think that anyone thinks that we need fundamental changes. However, it is commonly acknowledged that sooner or later we need to raise the retirement age but there’s not the political will to do it just now.”
Just how little political will exists was seen in August when Brian Mikkelsen, culture minister and Conservative deputy leader called in a newspaper interview for a more flexible pension model that would lift the pension age to 68 or 70. He added that an ageing population meant that eventually the state would not be able to afford a national old age pension for all so adult Danes should be required to contribute to a private pension scheme. The day before Mikkelsen’s interview was published his party leader, economy minister Bendt Bendtsen, was quoted in another newspaper as saying that while the Conservatives thought something should be done at some point, they were no longer pushing such an agenda. “Mikkelsen’s comments provoked an outcry, his people said they didn’t understand his outburst and he lost his position as the favourite to succeed Bendtsen,” notes Anders Johansen, political editor of Danish financial newspaper Børsen.
Mikkelsen should have known better. In recent years pensions have not just dented political careers but brought down governments. A Social Democrat-led coalition was narrowly re-elected in 1998 on a pledge to retain an early retirement scheme that the right-wing Venstre party had pledged to scrap.
The system, which had been initiated in the late 1970s at a time of high youth unemployment as a way of creating vacancies by tempting older people to leave the labour market, offered retirees benefits at 60 that corresponded to unemployment pay until 67 when they were moved to the lower-paid state old-age pension. But while intended for those who had worked for years in irksome, physically demanding occupations it had became an option for those in more privileged, middle-class professions.
Venstre’s pledge had been a response to changed demographic and employment patterns, and within months the Social Democrat-led government introduced measures to encourage people to remain at work until they were 65 including diluting the benefits paid at 60.
The administration’s subsequent electoral defeat was ascribed in large measure to this reform. “It was punished not so much for what it did but because of a perception that it had gone back on its word,” says Børsen’s Johansen.
A new Venstre-led government took office having promised Thatcherite-style reforms, and one of its first initiatives was to commission finance ministry official Per Bremer Rasmussen to examine how greater consumer choice could be introduced into the pensions market. The resulting Bremer report, Free Choice of Pension Savings Investments, published in May 2003, included a number of recommendations to open up the pensions market but by the time they were transferred into legislation the government had evidently tempered its ideology with an element of caution.
“The genesis of the Bremer report was the government’s wish to liberalise the pensions system,” says Jesper Kirstein of consultancy Kirstein Finans. “But it was up against a pretty conservative industry where changes do not come easily and where they can dig up many technical reasons for not changing the system and it ended up with proposals to introduce elements of choice into SP and LD. We have a phrase in Denmark that sums up the government’s approach: it leapt like a lion but landed like a lamb.”
Where the government fell short was in pressing for changes within the labour market sector of the Danish pensions system, the fastest growing area and itself the result of an earlier short-term political fix that has proved to have long-term implications. “The system is based on a tripartite agreement in 1987 after a previous Venstre-led government called trade union and employers’ representatives together to try to find a way out of a spiral where higher wages led to higher inflation which led in turn to higher wages,” recalls Peter Damgaard Jensen, managing director of major labour market scheme PKA. “But the labour organisations’ price for moderating their wage claims was the labour market pension system, which existed for some professional groups, be extended to a large group of blue-collar workers who didn’t have a pension at all.”
It was an example of a much-repeated pattern, with governments working to short-term electoral schedules making decisions about a long-term industry. However, since then it has grown into an exemplarily successful programme, notes Steen Müntzberg, senior counsellor at the Danish Employers’ Confederation (DA) and its representative on the Pension Market Advisory Council. “We have established a second-pillar system that covers more than 90% of the workforce, which has very low costs compared with others and which can offer a pension with sickness insurance without having to subject the individual worker to a medical examination,” he says. “You could call it solidarity.”
Demands for liberalisation have been part of the background noise around the Danish pension system for some time before the last election, notes Jan Kæraa Rasmussen, chief economist at the Danish Confederation of Trade Unions (LO) and a member of the Pension Market Advisory Council. “There have been two kinds of pressures on the labour market schemes,” he says. “The first was to produce more individual choice in investment from commercial companies which had supplied the market with hundreds of funds and put out advertisements on their best performers but managed to forget the others. But there is also pressure from the politicians not only for ideological reasons but because some were also convinced that it could deliver an economic benefit for savers.”
However, once in power the minority Venstre-led coalition lowered its sights. “The politicians became worried at the effect a liberalisation might have on the strength of the Danish system,” says Kæraa Rasmussen. “They saw that by having a mandatory system, either by law like the supplementary earnings-related scheme ATP or by collective agreements like the labour market schemes, you remove much of the financial burden and financial risk from the welfare state and make the whole economy sustainable. So just as the politicians were about to launch the free choice ship, they stopped it on the slipway because they realised the risks. The result was they made some very visible changes and got their message out, but they stopped short of where it really mattered and did not disturb the basic system.”
Damgaard Jensen of PKA notes that they stood back from it because if they really pursued choice into labour market schemes they would have to go into the labour market agreements, “and if there is something that Danish governments know that they have to keep away from it’s interfering in the labour market. Whenever a minister says something along such lines they are warned by both the employers’ and the employees’ side to keep away if they want to have peace in their time.”
Both LD and SP were the results of other short-term political manoeuvrings that have proved to have a longer-term impact when governments decided to curb consumer spending by co-opting allowances that should have been paid to employees to offset inflation to form LD in the late 1970s and in the late 1990s by earmarking 1% of salaries into the SP, which is administered by ATP. LD’s one-off input of a little over E1bn as since grown to some E7.3bn while SP’s assets were valued at E5.8bn at the end of 2003.
Seeing the way the political winds were blowing LD decided four years ago to allow pension holders to choose between continuing to let LD continue to handle the funds collectively or to opt for their assets to be managed by third parties in a number of pools with very broad investment profiles. Under the new legislation members will be able to move their LD savings to other pension institutions from 1 July 2005. ATP has decided to allow SP pension holders to invest in a unit-linked scheme, the Folkebørsen or people’s stock exchange, that will start in July 2005 and which many see as having parallels with Sweden’s PPM system. SP will offer a range of some 200 funds while PPM has more than 500 active funds.
But critics were quick to highlight two short-term problems. The first is cost. “ATP will spend an enormous amount of money trying to put the SP system in place – information platforms, trading platforms, foreign managers – but payments to the scheme have been stopped and it’s very hard to drum up any support for managing DKK8,000,” says Kirstein. “So this is not going to be a huge success.”
The second problem is uptake after the investment. At the end of 2003, third parties managed only 6.4% of LD’s assets. It has since risen to something like 10-15% but is still low, with the industry expecting only one in eight to do it.
Critics have also pointed to the long-term danger of the investment choices of those who do opt to move. “They do it on the basis of historical results, so when the environment sector posted good results in the beginning of the exercise because windmill equities were doing well everybody chose that but then it fell. It’s very problematic,” notes one industry player.
Michael Møller, a professor of the Copehnagen business school, has highlighted the irony of politicians, who over the last 20-30 years have striven to create an all-covering private pension system in Denmark, pursuing an initiative that would allow people to gamble part of it away.
LO economist Kæraa Rasmussen does not see the SP/LO initiatives as dangerous per se. “The amount involved is not big and the SP is meant as a business cycle management fund and what it produced was this 10-year income scheme with no insurance elements and conditional on what was paid in,” he says. And the same goes for the LD fund.
But although the government recoiled from forcing liberalisation on the labour market schemes a number of then have responded to the
liberalisation trend that Kæraa
Rasmussen notes.
“Before the Bremer report was published we had already introduced a number of free-to-choose elements in our pension schemes and our model of combining collective pension schemes with a high degree of individual choice was highlighted in the Bremer report as an example of how to do things,” says Torben Möger Pedersen, managing director PensionDanmark. “When the new labour market pension schemes for blue collar workers started in 1993 the contribution rate was 0.9% of wages. When the decision was made to lift the rate to 9% it was decided by the boards of the three schemes we run that it was at a level that made it feasible to offer a number of choices, which had not been the case when contribution rates were between 5% and 7%.”
Pedersen adds: “On the investment side we introduced a unit-linked system, which means that members can choose a mix between bonds and equities other than our default choice or they can opt out of our equity management and decide to invest the equity share of their savings in a number of external mutual funds.”
However, PensionDanmark has also seen a low uptake on the option. “The number of members actively making such choices is low, with less than 1% using the external fund managers,” says Pedersen. “But when we have surveyed our members we have found that 80% say that they have found this new facility good or very good, but of this 80% less than 20% say that they would do it.”
And PensionDanmark has put mechanisms in place to limit the damage inflicted by unwise investment choices by its members. “We have limited the choice of equity funds and all are highly diversified,” he says. “Our members can choose between a number of global equity mandates but they are not allowed to put all their savings in, say, Russian technology. They can also choose from among the managers to whom we have given a blueprint.”
But some are trying to resist the unit-linked trend. “We don’t like this because we think that our members really can’t afford to loose much because their basic pension is fairly low,” says Michael Weischer, investment manager responsible for overall asset allocation for Pen Sam. “They are mainly in the public sector with assistant nurses being our largest group and other being in lower-skilled occupations. Consequently, we don’t think that it is in their interest for us to create unit-linked opportunities for them. But with more and more pension funds having created such possibilities so the pressure to introduce unit-linked arrangements is increasing and I think that five years from now we will have it, although two years from now we probably won’t. But if everybody else has it is very hard to avoid it.”
Erik Adolphsen, CEO of Industriens Pension, agrees. “It is certainly not a member wish to have unit-linked options,” he says. “But I come from Jutland, and when people ask whether it is nice living near Copenhagen I tell them it is because of all the things one can do, like going to the Royal Theatre. When they ask whether I do that very often I have to reply no, but that it is nice that I can do it if I want. It’s the same with choice. It’s part of the way we live now but very often people forget that having an option, having a choice, has a price. Nevertheless, I feel that we have to do it, you might say for ideological reasons, but we are doing it in a way that keeps the cost to a minimum.”
But Adolphsen also has strong feelings about the role of politicians in the pensions industry. “In my view politicians seem to believe that they can solve all the world’s problems, and they cannot,” he says. “I think they should keep away, to be quite honest.”