More pension choice for Danish workers
At the huge ATP scheme, which is the funded part of Denmark’s statutory pension provision, they are grappling with implementing the government’s promise of greater choice in the public sector.
“In the pension area, as well, the government thought that there should be more opportunities to make their own choices,” says Bjarne Graven Larsen, chief investment officer of ATP, the Labour Market Supplementary Pension Scheme, based in Hilleroed.
“On the investment side, where the Danish system is characterised by providing nominal guarantees, the government wanted to review if this approach was the right one, or to move more to a pure defined contribution where individuals could influence how the money is invested.”
The Bremer Committee, set up under a senior ministry of finance figure, reporting on pension issues, suggested first that people should be able to move out of the Dkr54bn (e7.3bn)LD system (see panel) and, secondly, out of the Special Pension Savings Scheme (SP), which is managed by ATP. The SP is on a defined contribution basis already, in contrast to the guaranteed and insurance style benefits provided by the main ATP fund.
SP started life as additional pension fund started in 1998, with currently some 3.3m Danes paying in 1% of their pay packets and collectively holding assets that were valued at Dkr43bn(E5.8bn) at the end of 2003.
People are being given the choice of moving their SP assets and future
contributions to another pension provider, but if they do, the terms offered must match those of SP, for example, benefits only to be taken at age 65.
The second approach took account of the fact that ATP is an efficient provider of administrative services and provided that the public be given the choice as to who should invest the assets, ATP or someone else, says Graven Larsen.
Currently, ATP is finalising a platform to enable individuals to move their SP money as from January next year through a web portal ‘Folkeboersen’, or ‘People’s Stock Exchange’, offering a unit-linked type internet platform, where Ucits providers can place their funds.
“All those who want to have their Ucits funds on the platform from the start date need to register by 1 July this year.” The procedures for doing this are now in place and available.
The full details are on the
web-page of the Copenhagen stock exchange(CSE), which has been awarded the contract to interface
with the funds. It is reached
on www.cse.dk/kf/atp-forside. “ATP decided to outsource this to the CSE, since it has all the skills for these activities.” The Danes do much of their fund investing through the stock exchange.
Up to now, the SP system has collected a flat rate of 1% of individual earnings each year. But in the last few weeks the government announced that it is suspending payments into the SP system, in order to stimulate consumer demand fiscally, by giving consumers extra cash in hand for the next two-year period. “But if the economy overheats, they now can adjust the SP contributions upwards again - up to 2% of earnings,” Graven Larsen points out.
This means that the ATP platform comes in at a time when the public will be contributing 0% to SP. While this is not fatal to the project, he acknowledges: “You cannot rule out that it might have a negative effect.”
However, there are the assets currently in the SP accounts, which will be transferred into the new system, he points out. “In addition, people will be able to move money from the LD system into the ATP platform if they want. So the Folkeboerse could see some inflow from this as well.”
All SP account holders will be given a choice about what to do about their account. If they do not react, they will go to the default fund, which will be an ATP Ucits fund, he points out. In fact, there will be three funds with age-related investment strategies. “For the younger to middle aged, the equity proportion will be around 60% equities, then it will be reduced in stages so that at retirement it will be about 20% equities,” Graven Larsen says.
After the transfer to ATP, people will be able to track their holdings on the web. “If they want to change, it is just a question of going onto their web page, and making the change in investment - from day-to-day if they want.” The system aims to be very flexible and transparent, enabling changes to be made instantaneously or with just a short time lag, he says.
Outside providers wanting to put their Ucits funds into the system have to register these with the Financial Supervisory Authority in order to market it in Denmark.
He says ATP has had a lot of interest from the international players that they have contacted directly. “We expect that they and many of the other fund groups will be participating – the response has been very positive.”
The system sets out the fee basis or rebates that fund groups have to pay, related to the success they have through the portal. “This is not so aggressive as the Swedes introduced for their PPM system.”
The reaction among the Danish public has been positive to the SP change in his view. “It has been difficult for the public to obtain an overview of the Ucits market and to get some simple and credible information about the consequences of their investment choices.” One of the government’s aims is to improve the transparency of the Ucits marketplace. “The hope is that with a move involving 3.3m, more people will become increasingly interested in Ucits and the shares, and so help the investment culture to grow in Denmark.”
The shareholder groups and the consumer bodies have welcomed the initiative. “But for some of the Danish financial providers, it may be a question of not being sure whether they should laugh or cry. The increased transparency may mean they have to reduce their fees on their own ranges of Ucits funds,” he says.
Referring to the Swedish experience when launching the PPM, millions of kroner were spent on marketing overall. “What was quite amazing was that 92% of the Swedish population made an active choice,” says Graven Larsen. This is still being evaluated in Sweden, since investors went to the funds in 1999 that had the best performance, so a relatively high proportion went into high tech stocks funds at precisely the wrong time, leaving many Swedes nursing heavy losses. “There is a debate in Sweden that perhaps they advertised too much and informed too little about the consequences of their choices.”
In Denmark, there will be an information campaign to make people aware of the choices they have, but it will be limited. “We believe that people should have some tools and we are developing these on the website.” These will look at such areas as individual’s risk profiles, how to allocate across different asset classes, and then take the decision about the asset manager choice. “We have joined up with Morningstar and are using its rating system. While this cannot stand alone, nor is necessarily a good predictor of the future, it will enable people to see the costs involved in each fund.” The aim is to provide some red, green and yellow lights on the risks in the different funds. “So people will have some simple tools to make asset allocation with. So if they want 20% in global equities, then how they should look at the different global equity managers? We should give some relevant information on how the funds are different.”
Each year, SP payers receive a statement of their account and with this year’s letter an explanation of the new choices will be included. “But we are not going to send out a 100-page fund list to people.”
As far ATP is concerned it is ‘all systems go’ to get ready for the new world in 2005. “For us at ATP, it is a very high profile project and we are determined to make it successful.”