Denmark: Moves to boost pension saving
Government plan offers incentives to encourage Danes to save more
• A new government plan aims at removing disincentives to save for private pensions.
• The government will allocate DKK2.5bn (€336m) with the aim of making it worthwhile for all age groups to save.
• The Financial Supervisory Authority has prompted a debate on non-guaranteed pensions.
• Pension funds have won a victory against the tax authority on witholding taxes.
Moves by legislators, regulators and the pension funds themselves have contributed to a changing operating environment in Denmark’s pensions sector over the past year.
A new government plan was published in May under the title ‘More Years on the Labour Market’, outlining legislative proposals designed to increase the advantages of saving for private pensions and shrink the number of people saving little or nothing into a pension.
The plan attempted to address a problem the pensions sector has long lobbied the government about – that the current rules mean extra contributions made into pension plans are in some circumstances offset by reductions in state benefits.
Dubbed the ‘interplay’ problem (samspilsproblemet), pension providers say this effect of existing regulation discourages pension saving.
In the proposal, 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 plan increases 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). At the same time, it reduces the maximum that can be saved annually into this type of plan for all other age groups.
According to the government, this measure will help with the ‘interplay’ problem by increasing the old-age pension contribution limit at the stage of life when it is most intense. It will also make it possible to save into a type of pension that does not reduce state benefits.
As well as this change, the government said in the proposal that it would allocate DKK2.5bn in a way that will make it worthwhile for all age groups to save for a pension.
Concrete proposals are expected this autumn on what exactly the government will do with this sum.
As a package, the response from the pensions sector to the government’s new plan has so far been lukewarm. There are misgivings about the brevity of the five-year period for boosting pension savings before state pension savings, as well as the relative complexity of the plans.
In May, the government of prime minister Lars Løkke Rasmussen gave up its plan to increase the state pension age by six months from 2025, because of weak political support for the move.
Currently in Denmark, people born between 1956 and 1962 are entitled to receive a state pension at the age of 67. Under the shelved plan, this age would have increased by six months to 67.5 years.
Løkke Rasmussen, however, has said the government will continue to work towards motivating Danes to stay in the workforce for longer.
The Financial Supervisory Authority (FSA) has continued during the past year to address issues around pensions and risk.
These include: the investment risk involved in direct lending; the adequacy of skill levels within pension funds regarding alternative investments; and the risks to which pension scheme members are exposed.
In March, it sharpened its focus on the shifting of investment risk towards pension customers and away from pension providers through the trend towards market-rate, non-guaranteed products.
The regulator held a conference in Copenhagen on the topic, published a subsequent discussion paper and received consultation responses from the industry.
At the same time, the Danish pensions and insurance industry body Forsikring og Pension (F&P) released its proposals for initiatives on non-guaranteed pensions.
These involve introducing pension forecasts with more information and illustrations of uncertainty; giving clarity about where consumers’ pension savings are invested; the introduction of uniform; and simple risk labelling and guidelines for best practice.
In its discussion paper, the FSA said that current regulation is directed more towards traditional pension products that have guarantees than towards unguaranteed products.
Because of this, it said there could be a need to consider whether the current set-up contained enough consumer protection to create justified confidence in today’s pension products.
A court victory for labour-market pension funds PensionDanmark and Industriens Pension in July against SKAT, the country’s tax authority, has paved the way for large refunds for investors across the country’s pension sector. It sets a precedent for the Danish occupational and labour-market pension funds’ future ability to credit foreign withholding taxes within the Danish PAL tax (PAL or pensionsafkastskat is a tax on pension returns).
After a 2010 change in the PAL system, SKAT issued a new interpretation of the offsetting rules for foreign withholding taxes which largely removed the right of PensionDanmark and other funds to deduct the levies in accordance with the so-called net principle.
But the National Tax Tribunal’s (Landsskatteretten) July ruling upheld the pension funds’ assertion that the Danish tax authority did not have the required legal basis to remove this right.