DENMARK - The Organisation for Economic Cooperation and Development (OECD) has proposed the Danish government reform make several "minor changes" to its existing pensions regime to improve the returns and potential income pensioners may receive at retirement.

A study conducted by the OECD noted Denmark has the best pensions funding system in Europe - describing it as "well-developed".

The Danish system had assets in private pensions product amounted to approximately 138% of GDP in 2005, and 88% of Denmark's 2.8 million employees contributed to one or more pension schemes at that time so "the risk of poverty amongst people over 65 year-olds is the lowest in the EU 25, equal to Norway".

Yet the body suggested "minor changes to the system" could be made, including slight alternations to balance the tax treatment of "capital income outside pension funds" as its findings indicate "the tax rates on capital income outside pension funds are significantly higher than the tax rates on pension fund earnings" and the OECD believes these taxes are "probably too high".

The Danish government is already making changes to its tax regime from January 2009, on the back of the ECJ ruling in January last year concerning withholding tax on overseas investors, which will see the focus of tax shift from pensions institutions to individuals, to accommodate the opening the market to overseas pensions savings institutions.

However, this does have a knock-on effect as it is also means the end of tax exemptions for pensions investments in rental properties and indexed bonds.

Homeowners might also have an advantage over tenants as they can adjust their mortgage repayments over time and allocate more money to their pensions with the additional monies, argued the OECD in its report, although officials recognise "there is no readily available data on the extent to which individuals are borrowing and effectively channelling the funds into a pension scheme, but there are several issues associated with a significant trend in this direction".

Denmark also has a tax regime which currently allows mortgage interest expenses to be deducted from income when calculating income tax liability: an issue the OECD suggests be rebalanced, albeit cautiously as too strong a move could damage the economy, by perhaps applying an extra rate of 1.5% in property tax "to achieve neutrality with respect to the interest deductibility of negative capital income".

At the same time, the OECD suggests amendments could be made to the terms of a pensions arrangement to give more choice over an individual's "savings profile" and the share of gross income they save, as evidence suggests some individuals may be "over-insured" if they have no dependents and might benefit from placing life cover assets in their pension plans.

Additional changes should perhaps be made to limit the choices of investment options an individual pensions member could have, suggests the OECD, citing evidence from the Danish LD, as it could have an impact on the returns generated.

"Members who exercised their right to decide on the asset allocation of part of their portfolio achieve lower returns over the five-year period to 2004 than investors who have retained the default portfolio chosen by the LD administrators. This may be because investors tended to take a backward-looking approach, rather than adapting to changes in the market real-time," the report noted.

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