Denmark: Addressing the problem of ‘interplay’
Measures are being put in place to make saving for retirement more attractive
• Insurance & Pension Denmark has published an action plan for increasing consumer awareness of risk in market-rate pensions
• The government has agreed a tax plan to help solve the ‘interplay’ problem – where people lack the incentive to save for pensions in later working life, pensions income is offset against social security
• Proposal from the Entrepreneur Panel (Iværksætterpanelet) for more openness on pension funds’ investments have gained backing from ATP, Danica Pension and PFA
• A government-established working group has published recommended initiatives to simplify financial regulation
Danish pension providers are under pressure to do more to ensure their customers are aware of the investment risks involved in non-guaranteed, market-rate pensions. The industry association has come up with a plan to address the underlying problem.
There has been a gradual shift in Danish second-pillar pension provision for some years towards this type of pension product – where the investment risk is borne by the individual rather than the company – away from the traditional guaranteed with-profit pensions offered by labour-market pension funds.
The Danish Financial Supervisory Authority (FSA, Finanstilsynet) published a discussion paper on the adequacy of consumer protection for non-guaranteed pension products in 2017.
In March, Insurance & Pension Denmark (IPD, Forsikring & Pension) published its anticipated set of four new consumer initiatives designed to improve the information on risk and return provided to pension scheme members in Denmark.
These measures to be taken are:
• Pension forecasts including information about risk and the payout process are to be provided to customers. This is to be implemented in January 2019 for forecasts of expected payments, based on independent experts’ assessments, with forecasts on the uncertainty of expected payments to be implemented in January 2020;
• Risk labelling of market-rate products: A standardised risk-labelling system is to be introduced assessing short-term risk and the risk of the ultimate pension payments. This is to be implemented in January 2019 for one-year risk assessments and January 2020 for pension payments risk;
• Transparency of portfolio composition: Pension companies will be required to disclose the investments behind customers’ pension savings, divided into the same set of asset classes that the forecasts and risk-labelling are based on. This is to be implemented in January 2019;
• Guidelines for the prudent-person principle: IPD has established seven best-practice guidelines for how companies comply with the prudent-person rules on investment. This is to be implemented in January 2019.
Changes to the amounts Danes can save into the different types of private pension vehicles came into effect this year in a way that increased the incentives for people to save in the latter part of their working lives.
The pensions industry and others have long called for a solution to the ‘interplay’ problem in Denmark, where putting pension savings aside can be financially counterproductive for older workers because private pensions income is offset against social security benefits.
In February 2018, the government went further towards tackling this problem when it, and its key ally the Danish Peoples’ Party, finally agreed on tax reforms, including incentives for retirement savings.
The deal earmarks DKK5bn (€670m) to lower tax rates, especially on work and pension contributions, and a key part of the reform is that up to DKK70,000 a year in pension contributions will be tax deductible for individuals – with the deduction targeted at the point in working lives where the interplay problem is at its sharpest.
Under the proposal, Danes with more than 15 years to state pension age will be given a 12% deduction rate, whereas those with 15 years or fewer will have a 32% deduction rate.
In addition, a new tax deduction for employees and the existing employment tax allowance now take pension contributions into account, which has hitherto not been the case.
A proposal to make pension funds more open about the companies they invest in – which originally came from the Entrepreneur Panel (Iværksætterpanelet) and was put forward by the government and opposition parties – has been backed by leading Danish pension funds ATP, Danica Pension, and PFA.
The plan includes DKK14.7bn of funding and the launch of a new kind of equity savings account for individuals. It involves pension funds making an annual declaration of their equity holdings, dividing them into Danish and foreign shares, as well as by size and sector. The political hope for the plan is that it will increase incentives for pension companies to invest assets in Danish growth companies, if requested by customers.
In April 2018, IPD took part in a working group aiming to find ways to simplify financial regulation in the country, part of a broader government red-tape cutting exercise. The group was set up by Denmark’s ministry of industry, business and financial affairs and also included banking lobby group Finans Danmark, the Danish central bank Nationalbanken, researchers, and others.
The group recommended 56 initiatives covering direct EU regulations, Danish implementation of EU regulations, special national rules, and the supervision activities of the Danish FSA. It also looked into whether regulation could be made more compatible with digitalisation, and how more use could be made of technological developments.
Expert panel to set pension forecast assumptions
A new panel of independent experts is being set up in Denmark to establish the assumptions required to determine private-pension forecasts – work previously done by industry associations.
Industry bodies Insurance & Pension Denmark (IPD, or Forsikring og Pension) and banking association Finance Denmark are putting the new independent commission in place.
They have appointed Jesper Rangvid, professor at Copenhagen Business School, as chair of the panel. Torben Andersen, professor at Aarhus University and chairman of the board of ATP, and Peter Engberg Jensen, chairman of the board of state-owned company Finansiel Stabilitet and former chief executive of Nykredit, have been named as the other members of the panel.
The men will determine the pension calculation assumptions from 2019. Since 2005, these assumptions have been laid down by the two associations directly with reference to the Danish FSA (Finanstilsynet), but the organisations agreed back in the spring to set up an independent panel of experts to undertake the task.
Per Bremer Rasmussen, chief executive of IPD, said the common assumptions that were used for predictions on returns and for the uncertainty of returns had to be as precise as possible, so that no one doubted the expert basis for the forecasts.
“Even though the common assumptions have matched the actual development very precisely since 2005, we wanted to ensure the highest possible level of credibility by asking an independent and expert council to set the assumptions,” he says.
Rangvid says that increasing lifespans coupled with the fact that more Danes were now saving for pensions based on market rates at a time of historically low interest rates, means there were some key calculations to be made that were important for individuals.