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Pensions In Nordic Region: Could do better

Denmark’s pension system might have achieved the top score in the most recent Melbourne-Mercer international rankings but there is still work to be done. Rachel Fixsen spoke to Torben Andersen, chairman of the new Pension Commission, about the work in hand

Denmark’s pension system has won praise internationally for its sustainability and adequacy and for the last two years it has held the number-one ranking in the Melbourne Mercer Global Pensions index. A widely-recognised strength is the labour-market pension system, whose coverage was extended considerably between 1989 and 1993 and whose funds have since matured.

Despite this, the pension system seems to be a work in progress. Funding may be high compared with other developed countries, but many stakeholders have raised concerns about pensions taxation, the means testing of pensions-related benefits, and transparency.

In May 2014, the government took a step towards tackling such problems when the Ministry of Taxation announced that a pensions commission would be set up to consider these issues. Morten Østergaard, the then minister for taxation, said that although the pension system was generally good, one of the problems was that ordinary families were being hit by an effective marginal tax on their pension savings, which was, in some cases, higher than the rate of tax they paid on their income. 

He also said that while the system had to offer security for pensioners who had the least, people should not be discouraged from saving by the complexity of pension rules. 

The commission has already formed and has held its first two meetings. “We are slowly but steadily getting into position,” says commission chairman, Torben Andersen, professor of economics at the University of Aarhus. While much of the work will take place through traditional meetings, this is being supplemented by electronic communication. Alongside Andersen, the commission consists of four other members (see Members of Denmark’s Pension Reform Commission).

At a glance

• The government has appointed a five-person Pensions Commission to look at issues of pension savings incentives, transparency and complexity.
• Torben Andersen, professor at Aarhus University, will chair the commission, which will be administered by the Ministry of Taxation.
• Stakeholders, including the F&P insurance and pensions association, will participate in the commission’s work.
• Precise data are still needed on individuals’ total projected pension and there is no easy way to reconcile means testing with pension savings incentives.

Part of the mandate is to allow the various organisations involved in pensions provision, and affected by it, to present their points of view. These include employer and employee representatives from labour market organisations and the insurance and pensions association, Forsikring & Pension (F&P).

“Our task is to clarify how the current system is working now, and how it will do over time when more people have accumulated larger pension sums,” says Andersen. “The labour-market pension schemes are still in the build-up phase, and they will not reach a fully mature situation until about 2040. The analysis we produce will cover how things are likely to change as we approach this new normality.”

Collecting data will be a key part of the commission’s task and a prerequisite for the analysis it has been charged with performing. “We do

 have a lot of good data, but we don’t have precise data on the level of pension savings for individuals,” Andersen continues. “That data will be available early next year.”

At the moment, there are no coherent statistics on pension savings at the individual level but by 2015, when these figures come on stream, it will be possible to assess the total pension coverage of the Danish population for the first time. “What we need to know is the exact replacement rate an individual can expect to have in the future, given their public and private pension,” Andersen says.

Members of Denmark’s Pension Reform Commission

• Torben Andersen, professor of economics, University of Aarhus (chairman)
• Jørgen Elmeskov, chief statistician, Statistics Denmark
• Nabanita Datta Gupta, professor economics and business, University of Aarhus 
• Lisbeth Pedersen, head of research unit on employment and labour market issues, Danish National Centre for Social Research (SFI)
• Carsten Tanggaard, professor of finance, University of Aarhus 

So while using data and analysis to establish how the interaction between public and private pensions actually works – taking into account means-testing and tax – is a key part of the commission’s job. The other is to make the system simpler and more transparent.

“To say it’s complicated is an understatement,” Andersen says. “For normal people, it’s impossible to say how much they will receive in retirement because there are so many rules. That reflects how policymakers have, over time, tried to solve various problems that came up.

“First and foremost, people have a basic question about their pension: what pension can I expect – the total sum from the various elements of public pension, labour-market and perhaps individual pension savings on top of that. People want to know ‘what are the consequences if I take early retirement or I put more into my pension?’.”

Andersen acknowledges that Denmark does have a good, robust pension system by international comparison, but he still sees work to be done.

“I think we have a good starting point compared to most other countries, in terms of the sustainability of the system,” Andersen says. “The profound, basic issues are under control but of course there are a lot of finer details.”

Denmark’s reform process gradually takes shape

• Denmark has embarked on the first steps of a reform process through the appointment of an independent commission under the remit of the Ministry of Taxation. 
• The Commission is to consult, gather views and assemble data, in order to produce analysis, guidelines and advice on potential solutions. 
• The Commission is in the early stages of its two-year task. It has started with gathering information from stakeholders.
• Once complete, the Commission will draft its conclusions and present these to government and the public. 
• The government will then decide whether to adopt the recommendations.
• These will then be drafted as a bill to present before parliament, and will become law if passed by members.

Denmark is not the only country to use means-testing in its provision of the state pension and related benefits. This can often lead to conflicts and discourages pension saving for wealthier individuals.

“There’s no magic trick,” Andersen says. “Once you aim to target public pensions to the least well-off and make others save for their pensions, you cannot escape the fact there will be means-testing in the system.”

While the average Dane can look forward to a good replacement rate when they retire, the Commission needs to tackle the problem of how to ensure that all participants have the prospect of a decent pension and replacement rate. “Particularly for certain segments of the population, increased saving would have a small effect on their net pension due to the reduction in their public pension,” the chairman says. 

As things stand, if a person saves an extra DKK10,000 (€1,343) a year into their pension, they might lose part of the pension supplement paid by the state alongside the basic pension, meaning, that for some groups, the benefit of putting the extra money away would be very small.

“It is not so easy to see a solution because it is a targeting problem – public pensions are targeted at lower earners,” Andersen says.

The taxation of pensions is an issue. At the moment, different rates of tax applied to different types of savings can create uneven levels of incentives.

In the past two years, regulations on lump-sum pensions (kapitalpensioner) have changed, allowing holders to pay less tax – albeit in advance, rather than when the pension is paid out – if they switch to what is termed an old-age pension (alderspension). 

Andersen sidesteps the issue of whether or not the Danish government was short-termist in making the change towards advance taxation, but describes the move from a consumer’s point of view as, “another example of a complication that has been thrown into the system”.

In a democracy where a new government is elected every few years, is it possible to reform the pension system so the individuals can be sure of the retirement income they will receive years or decades down the line?

Andersen believes the commission can, at least, do its best. “I think policy discussion and planning and reform of the pension system is the best way to make the system robust for people. Of course, policy makers might make some different decisions in the future — that can’t be ruled out.

“But, if we start with a system that is too complicated, or opaque, or which contains a lack of incentives, then we will have severe problems. Making the system robust and well-functioning is what the pension commission is trying to do.”

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