Denmark, as a result of public referendum, is not entering the euro. However, the national banks involved have agreed to maintain exchange rates Danish Krone (DKK) vs euro in a narrow band. Additionally, for Danish pension institutions, the rules of congruency are changed from this month. Sixty per cent of the liabilities expressed in EU-currencies, including DKK, can be matched by assets expressed in euro.

There are not any widely accepted benchmarks for Danish pension institutions.

Competition between funds, which have open membership, is based on the levels of guarantees proposed and historic bonus awards. Most pension institutions have large insurance portfolios with an interest rate guarantee of 4.5% to 5.0% per annum.

On top of the guarantee, a bonus rate is declared each year which significantly influences the level of business for the institution in the following year. Market pressures have lead to almost all the returns being declared as a bonus.

From January 1 2000 investment returns will be taxed at a flat rate of 26%. At current prices, the net of tax rate of return on Danish bonds will fall short of existing guarantees. Danish pension funds are thus unlikely to use their freedom to purchase lower yielding sovereign Euroland government bonds although they may be interested in higher yielding corporate bonds.

Over the last five years there has been a remarkable increase in the level of equities from 20% of total assets to 40% of total assets. The expansion has taken place in foreign equities with Denmark remaining at 20% and with Europe often taking a significant part of the foreign assets. It is likely that Europe will continue to be overweighted with some of the Danish equities being transferred into Euroland equities. Although the moves are likely to be restrained whilst Denmark remains outside the Eurozone.

More generally, the current level of guarantees and bonuses are not sustainable in this low inflationary environment. However, it will probably take a downturn in markets, and the ensuing funding crisis, to produce the structural changes required.

At this point, a sustainable level of guarantees and bonus policy can be introduced and, following this, a rigorous investment policy implemented. For now, the funds carefully monitor each other hoping not to be the worst off when the music stops.

S Schipira is with SB Aktuar Rådgivning