Denmark's private pension overhaul criticised by industry
The Danish government’s new political programme for pensions and retirement has received a less-than-enthusiastic reaction from the pensions industry, with criticism that the plan should do more to remove disincentives to save.
In the proposal – entitled “More years on the labour market” – the centre-right led coalition government outlined measures designed to increase the advantages of saving for private pensions and reduce the number of people who save little or nothing into a pension.
The government proposed increasing the amount that can be saved into an old-age pension plan (alderspension) in the last five years before state pension age to DKK50,000 (€6,720). However, it said it would reduce the maximum amount that can be saved annually into this type of plan for all other age groups.
The Danish pensions sector has long lobbied the government to solve the “interplay” problem within the pension system. This discourages saving, industry commentators have said, because under some circumstances extra contributions made into pensions are offset by reductions in state benefits.
Finance minister Kristian Jensen said in the introduction to the proposal: “Over time, we have expanded the pension system, so it has become one of the world’s best and most solid. However, we have also arranged ourselves so that it does not pay for some people to save for a pension because of the offsetting of state benefits.”
This, Jensen said, was “unreasonable” and “untenable”.
The proposal would make it easier to make pension savings without the offsetting problem, he said, by increasing the old-age pension contribution limit at the stage of life where the interplay problem was at its worst. It would also make it possible to save into a type of pension that did not reduce state benefits.
In addition, Jensen said the government would allocate DKK2.5bn [€336m] towards “making it worthwhile for all age groups to save up for a pension”. This will be implemented in the autumn of 2017 as part of discussions on tax initiatives.
Peter Damgaard Jensen, chief executive of pensions administrator PKA, which runs three social and healthcare-sector pension funds, said it was positive that the government was recognising that the interplay problem was real for many Danes, including PKA’s members.
“But we would like to have seen a longer period for saving up than five years before state pension age, without the offsetting,” he said. “We would also like to have seen an overall solution that was simpler for our members to understand.”
Jannik Andersen, head of human capital at Aon Denmark, told IPE his firm was so far not impressed by the government’s retirement plan, which only contained minor adjustments rather than any big changes.
But he said he waited with interest to see what concrete suggestions the government would announce this autumn regarding the promised DKK2.5bn woth of funding.
The new DKK50,000 annual limit could serve as a carrot for extra pension savings for people with lower income, Andersen said, due to this pension type’s lack of interaction with social services, but he added that in practice the effect was uncertain.
“It sounds like a good idea, but very few with low income can put this much money extra aside for pension purposes,” he said.
Because of the high level of tax in Denmark, DKK50,000 after tax was almost DKK100,000 before tax, he pointed out.
The government proposal has not yet been adopted by the government and will now be debated among the country’s many elected political parties.