Denmark’s largest pension fund ATP has made a bid to explain to Danes why both guaranteed pensions – such as its own first-pillar scheme – and the market-rate pensions increasingly offered by private providers have a role to play as interdependent elements of the country’s much-praised pension system.

In the latest of ATP’s occasional ‘Faktum’ (fact) analysis notes, the DKK676.9bn (€91bn) pension fund said the decline in financial market prices was having a negative impact on pensions.

“However, the Danish pension system is screwed together in such a way that when negative returns hit private pensions, public pensions compensate to a certain extent for the fall in private pensions in payment, through the so-called offset mechanism,” ATP said.

“Conversely, private pensions relieve public pensions when the markets generate positive returns – both through the offset mechanism and through PAL [pensions return] tax,” it said today.

“In addition to the offset mechanism, guaranteed pensions, such as the ATP Lifelong Pension, also contribute to stability when there are fluctuations in the markets, because the guarantees remain in force, despite the downturn in the financial markets,” ATP wrote.

The publication comes at a time when ATP has suffered huge losses, its total assets having lost about 29% of their value between January and September, and in the same period, average market-rate pensions average market-rate pension savings in the Nordic country have fallen 14%.

Around half of Danes with market-rate pensions in payment are set to see a decrease in their monthly payments in 2023, according to pensions and insurance lobby group IPD.

ATP’s guarantee-based business model has also been called into question once more by prominent professor of finance Jesper Rangvid, following the losses reported in the pension fund’s third-quarter interim report.

In the publication, ATP chief executive officer Martin Præstegaard commented on the shift over the past 10 years towards market-rate products from average-rate pensions with guarantees, saying: “In good times, when everything has gone up, it may have escaped people’s attention that some products are guaranteed, and others are not.

“In good times, when everything has gone up, it may have escaped people’s attention that some products are guaranteed, and others are not”

Martin Præstegaard, ATP CEO

“But it’s clear that the division of labour in the pension system has become a bit more obvious now, when people access their pensions account and see things have been going down,” he said.

This did not mean market-rate products were bad, he said.

“But it is important that we have a good division of labour and make sure we have the right mix of market-rate products, guaranteed products, lifelong annuities and installment pensions,” said Præstegaard.

Citing FSA figures, ATP said the proportion of pension contributions at life insurers and lateral pension funds going into market-rate products climbed to 74.6% in 2021 from just 8.3% in 2003.

Kent Damsgaard, CEO of IPD, was also quoted in the Faktum note, saying it was the interplay between the public and private pillars of the Danish pension system that made it unique.

Public pensions, the offset mechanism and the guaranteed ATP pension in pillar one ensured that the individual saver could have more investment risk in pillar two, thereby achieving a higher return, he said.

Damsgaard said on Friday that it was important that Danes knew more about their pension schemes.

Denmark’s pension system has for years been one of the few in the world to receive an “A” rating in Mercer’s annual global pension index.

Separately, three more Danish pension funds have now imposed withdrawal penalties on some of their average-rate pension products, according to the growing list of such measures published on IPD’s website.

The new additions to the list are AP Pension, Sampension and ISP Pension, with P+ having changed its list of products where withdrawal penalties now apply.

Withdrawal penalties, called ‘price protection’ (kursværn) in Denmark, constitute a measure taken by pension providers when investment losses wipe out bonus reserves.

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