The Danish Pension System: Structures and Current Debates

1. The Danish Pension System:Structures and Current Debates International seminar: Pension schemes for civil servants and pension funds Brasília, Brazil, 1-2 October 2003 Ole Beier Soerensen, Ph.D., Chief of Analysis, ATP, Denmark OBS@ATP.DK

2. The Danish pension pyramid Individual savings Labour market pension Universal tax financed basic pension & funded supplement

3. Reform process of the 90’s • To secure adequacy and to boost savings • Pension reform process of 1987 to 1998: • enhanced 2nd pillar coverage • 1st pillar supported by a funded tier • Raising pension contributions from 0 to 9 pct. • Complementary coverage for 85% of the employed work force • Growing long term importance of funded pensions • Collective insurance based DC-schemes

4. Completing an existing picture • Design gradually developed since the 1950’s • Political legacy dating back even further • Two principal features: • Universalism and flat rate benefits as principal qualities of public social security • Complementary coverage is not considered a public policy responsibility

5. Change of pension strategy in the 50’s • Traditional civil servants pension arrangements in the public sector: • Senior staff and professional staff enjoyed extended social security • Employer sponsored DB-arrangements, non-contributory and no pre-funding • Seniority and wage related benefits • Part of the employment contract • 50’s and onwards: new DC-models based on collective agreements developed

6. Two sets of political interests • Employers: • Anticipated growth in the public sector – mounting pension liabilities • Concerns over labour mobility and hiring practices • Employees: • Portability and vesting problems • Short termism professions • Equal treatment – male/female and part time/full time

7. The labour market pension model • Sector or profession wide multi employer schemes • Set up by the social partners through collective agreement • Collective agreement defines contribution level • 9 – 20% of wages - 2/3 employer & 1/3 employee • Forming a pension fund or an insurance company • Assets and liabilities are externalised

8. The content of labour market schemes • The compulsion – and the right - to participate • Insurance package covering old age, disability and survivors benefits • Variation as to benefit design • No individual health assesment • No discrimination based on sex or other

9. The insurance mechanism • Annuity and insurance contract drawn up at entry • Guaranteed nominal promises based on a safe set of parameters – i.e. minimum interest rate • Excess return allocated to the members over time as bonus allowances • Nominal promises adjusted by bonus allowances

10. The collective insurance approach • Very strong upsides: • collective sharing of social and financial risks, • low costs, • fair and cost-effective insurance benefits • coverage regardless of health etc. • supplying predictability and security • Possible downsides: • long term guarantees may be vulnerable • limited scope for individual choice

11. Current key issue: freedom of choice • Delicate balance: • Compulsion is neccessary in order to fulfill social obligations and provide security • Individual choice may be a key prerequisite for popular and individual commitment • Current debate: • How to expand the scope for individual choice?

12. Issues at stake in the current debate • Three variants of individual choice: • products, investments and insurance provider • Collective insurance and freedom of choice does not go hand in hand • "Adverse selection" • "Free riding" • Setting the individual free.. • … or dismantling mutual risk sharing? • social as well as financial priorities at stake