Rachel Fixsen assesses Danish pension funds' transparency about costs and fees
The question of how much Denmark's pension funds pay themselves, and their service providers, is currently under close scrutiny. A new initiative to facilitate comparisons looks set to further ratchet up the pressure.
The Danish Insurance Association (F&P) has been making efforts to increase costs transparency since 2006. As part of this, from this July pension costs for all customers are calculated in the agreed industry standard forms of AOK (annual costs in kroner) and AOP (annual costs in percent).In the next few months, the industry is to launch a comparison website giving data on pension fund activity, on cost but also on return, service level, size of pension fund and benefit, and other aspects.
The common method of calculating pension costs does not suit all. Unipension, for example, finds the official figures artificially inflate the actual costs customers pay. Whereas in the commercial pension sector, pension funds obtain their capital from the parent bank or shareholders, as a mutual company, Unipension's only capital belongs to its members.
Because it obtains its capital from members, it acknowledges this by making a payment to recognise the risk involved. The payment, which in 2010 was 4.5% of the equity, made up 60% of Unipension's average annual costs. However, this additional charge counts in the official cost figures of the fund and makes Unipension appear to be a higher cost pension fund, which has drawn criticism in the press.
Unipension says it is hard to explain to members that this is not a real cost to the fund or them; the fund is simply saving this cost and transferring it to members as a benefit.
Industriens Pension says that although the new published figures do give funds an extra argument for focusing on costs, there are some problems. One is that they do not reflect the differences in pension products, services and investment strategy.
CIO Jan Østergaard, says Industriens Pension has been among the cheapest based on administrative costs for many years because of economies of scale, minimal marketing costs, and a relatively simple pension and insurance product.
"But investment costs will be at the higher end because of an active investment strategy with relatively high allocations to asset classes with high costs," he points out, adding that of course these investment costs are deducted from the institution's returns, which have been among the top in the sector over the last five and 10-year periods.
On official tables, Bankpension is shown as having relatively high investment costs, which CIO Leif Hasager attributes to the fact that the fund has traditionally had high allocations to equities, private equity and emerging markets.
The demands of compliance with the EU's Solvency II directive have inflated costs to such a degree that for some pension funds, mergers appear the only answer. Certainly some past mergers have brought distinct cost advantages.
PensionDanmark - itself the product of a 2005 merger of seven separate pension funds - now boasts costs among the lowest in the industry at an annual DKK396 (€46) per customer.
Torben Möger Pedersen, managing director of PensionDanmark, gives five reasons for the low costs: outsourcing, an uncomplicated product, a high level of digitalisation, co-operation with the public sector on use of data and exploiting the economies of scale possible for a 600,000-member scheme.
"We practise a high degree of outsourcing of administration activities and are very focused on defining what services we want, and on monitoring that they are delivered by our external partners," he says.
In May, four of the eight pension funds under the PKA umbrella announced they would merge to form the Pension Fund for Healthcare Professionals. Although reducing costs was definitely part of the reason for the merger, PKA says it was about shoring up resistance to the increasing volatility to financial markets.
But straightforward consolidation may not always provide the answer.
F&P Deputy Director Carsten Andersen says there is ongoing pressure on pension funds to cut costs and increase efficiency, pooling costs and administration is one way of achieving this.
"It is obvious there are economies of scale in this market, but it's also important for the members of a (labour-market) pension scheme to identify themselves with other members," he says. "If you have mergers, this quality could disappear."
Some pension funds say they have considered mergers but come to the conclusion that the needs of their members are not the same as those in another industry. Other funds have opted to retain their identity but gain economies of scale by outsourcing administration, or investment, to a common provider.
Unipension, is the common administration service for three pension funds - the Architects' Pension Fund (AP), the Pension Fund for Danish MAs, MScs and PhDs (MP) and the Pension Fund for Agricultural Academics and Veterinary Surgeons (PJD). It was set up four years ago, but the three individual pension funds still have its own capital, members and supervisory board. Administrative costs at the pension funds have been reduced since the formation of Unipension, the provider says. It hopes to win contracts from more Danish pension funds.
"We see ourselves as an attractive business partner, since we have done really well with regards to investment returns and we know from benchmarks that we have probably the best member service in the business," says Unipension's chief actuary Steen Ragn.
Danish pension funds Lærernes Pension, PBU and PKA established the common pensions administration organisation Forca in 2006 with the aim of achieving economies of scale. As well as providing services for its three owners, Forca also serves Finanssektorens Pensionskasse.
Since Forca was established, PKA pension funds have managed to almost halve the costs to about €65 per member per year. "It is not all due to Forca, but it is definitely the most important driver in this respect," says PKA's head of communication Claus Skadhauge.
While the DKK15bn Bankpension is fully ready for the upcoming Solvency II regulation, CIO Leif Hasager, says the new demands will add to costs, with up to two additional full-time staff becoming necessary.
For this reason, it is looking to work jointly with other pension funds regarding outsourcing, as it is just not viable to do this internally. The fund is likely to link up with others in taking on an external provider, one concrete proposal is already on the table.
While still uncertain what form such alliances could take, future link-ups could cover areas such as ALM, administration and portfolio management and performance, Hasager says.
But he is doubtful about the benefits of mergers within the pensions sector, and says there is no evidence that they really do bring costs down. "We see co-operation among pension funds as more viable," he says.