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

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

Reform process of the 90’s To secure adequacy and to boost savings Pension reform process of 1987 to 1998: enhanced 2 nd pillar coverage 1 st 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

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

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

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

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

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

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

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

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?

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