Pension challenges in the future – in Denmark and Portugal By Nina Røhr Rimmer Associate Professor, MSc Econ University College Northern Denmark – Business

Why is the topic “pensions” interesting for a 20 yr old?

Population pyramids Portugal Denmark

Statistics: The average retirement age for people is according to Denmark Statistics is 64 years for men and 62 years for women 12 out of 100 young people do not live to experience retirement….. 12 out of 100 young people loose their working capacity before retirement…… Average life expectancy for men is 78 years and 82 years for women – and rapidly increasing Years in retirement: 78 – 64 = 14 years (men) Years in retirement: 82 – 62 = 20 years (women)

What should a pension scheme cover? Security in retirement State pension Labour market schemes Private pension schemes Equity in property etc. Security if dyeing Life insurance (lump sum payment) Pension for spouse and/or children (usually a time limit) Security if loosing working capacity Maintain standard of living even if income disappears or is being reduced

Is there a European pension time bomb? The ageing population is putting Europe's traditional state-funded pension system under great pressure. Most European countries are reliant on 'pay-as-you-go' systems where people in work fund pension benefits for the retired via a system of social security contributions. But in the absence of pension reform, or effective measures to boost the size of the working population, this system of pension entitlements can only be sustained through raising taxation which will have negative incentive effects for people in work) and / or reductions in the real or relative value of state pension benefits Source:tutor2you

Mercer Global Pension Index Denmark is ranked as number one in Melbourne Mercer Global Pension Index. Denmark made in 2012 its debut in the Melbourne Mercer Global Pension Index, and instantly achieves the 1st place, and provides the first A grade result. Denmark received an overall index value of 82.9 and becomes the first system to be classified as ‘A’ grade, moving Netherlands from the top position in the rankings. Denmark’s unique ‘A’ grade ranking has been awarded in recognition of the country’s well funded pension system, its high level of assets and contributions, the provision of adequate benefits and a private pension system with well developed regulations. Melbourne Mercer Global Pension Index expands to include 18 countries and covers over 50% of the world population

Country Overall Index Value Sub-Index Values Ranking Adequacy 40% Sustainability 35% Integrity 25% Denmark 82.9 1 78.1 86.0 86.4 Netherlands 78.9 2 77.0 73.0 90.3 Australia 75.7 3 73.5 83.2 Sweden 73.4 4 68.0 73.3 82.5 Switzerland 5 71.3 67.9 84.1 Canada 69.2 6 74.2 56.3 79.3 UK 64.8 7 68.1 46.5 85.0 Chile 63.3 8 50.1 67.7 78.4 USA 59.0 9 58.3 58.4 61.1 Poland 58.2 10 63.6 43.4 70.1 Brazil 56.7 11 71.5 26.9 74.8 Germany 55.3 12 65.2 35.9 66.7 Singapore 54.8 13 42.0 54.2 76.2 France 54.7 14 74.3 32.0 55.2 China 45.4 15 55.7 30.5 49.7 Korea (South) 44.7 16 45.1 42.3 47.5 Japan 44.4 17 46.1 28.9 India 42.4 18 37.4 40.7 52.8 Average 61.0 62.2 52.1 Results by Overall Index Value

Definitions by Mercer Adequacy (weight 40%) The primary objective of any pension system is to provide adequate retirement income. Thus, this sub-index considers the base level of income provided, the net replacement rate for median-income earners as well as several benefit design issues. Sustainability (weight 35%) This sub-index recognises that the long-term sustainability of the current retirement income system in many countries is a concern, particularly in the light of the ageing population, the increasing ratio of retirees to productive workers and, in some countries, increasing government debt. Integrity (weight 25%) It is critical that a nation has confidence in the ability of private sector pension providers to deliver retirement benefits over many years into the future. This sub-index therefore considers the role of regulation and governance, the protection provided to participants and the level of communication provided to members. This year we have added an indicator based on the World Bank’s Worldwide Governance Indicators.

Key indicators Denmark Portugal Average earnings 48,000 Euro Public pension spending 5,6% Population over 65 27% Net replacement ratio 95% Government debt 64% of GDP Average earnings 16,000 Euro Public pension spending 10,8% Population over 65 28% Net replacement ratio 65-69% Government debt 130% of GDP http://www.oecd.org/portugal/47273052.pdf and http://www.oecd.org/denmark/47272339.pdf

OECD Pension net replacement ratios DK PT http://www.oecd.org/els/soc/oecdpensionsindicators.htm

Pension systems Denmark Tier 1 State pension ATP (compulsory savings scheme for workforce) Tier 2 Labour market schemes Tier 3 Private pension schemes Portugal Tier 1 Public Pension (compulsory savings scheme for workforce) Tier 2 Labour market schemes Tier 3 Private pension schemes

Pensions systems Denmark Portugal Private pensions Private pensions - Lump sum, annuity, life annuity - Tax deductions Occupational pensions - 10% + 5% = 15% of salary - 90% of working population State – requirement = live in DK ATP - compulsory savings scheme – 150 euro + 300 euro p.a. Private pensions - Lump sum, annuity, life annuity - Tax deductions Occupational pensions - 1% of Co’s have pension scheme - 3,7 % of working population Public pension – compulsory savings scheme – 11% + 23,75% = 34,75% of salary

Maximum state pension is therefore: Denmark: State Pension – from 65/67 years (automatically increasing with increases in average life expectancy) State pension 10,000 Euro per year plus a supplement depending on other income 10,000 Euro (single) OR 5,000 Euro(married/co-habiting) Maximum state pension is therefore: 20,000 Euro (single) 15,000 Euro (married)

ATP – compulsory work scheme All employees Approx. 450 Euro p.a. paid by the employer Of which 150 Euro is your own contribution ATP pension is paid out from 65/67 years Life long pension 3,300 Euro p.a. (max.) For further information http://www.atp.dk/X5/wps/wcm/connect/atp/atp.com/private

General types of Pensions Capital pensions – with or without tax-deductions lump sum Annuity pensions limited period annuity payments Periodic payments pensions lifetime annuity

Tax and pension Contributions are often tax deductable (certain rules often apply) Amounts paid out are usually taxable Either as personal (taxable) income or Flat fee (in Denmark = 40%) Tax on return on investment (in Denmark): when placed in pension schemes = 15,3% for all types of investments, free capital = tax rates of between 27%-51.7%

Annuity pensions When can you make an annuity pension? Account must be opened no later than 77 years old. How much can you pay? 2013 Max. 6,600 Euro How is the money paid out? As a fixed amount per month for 10 - 25 years The payments will affect your benefits from the state Tax aspects Fully tax-deductible in ”personal income” When paid out - taxed as ”personal income” Consequence – less state pension

Life annuities schemes Several types now apply Original type as a core insurance product – i.e.. Life long payments after 62 years – payments stop when you die. Now an optional guaranteed payment is available to your family Possible to obtain a survival payment for your spouse and/or children - either for life or time restricted. Everyone can open an account regardless of age Is often opened also after 62 years Tax aspects when paid out = annuity pension From 2010 – the only pension scheme with unlimited contribution rights Hence the state will have to pay less when people save more/longer

Remember…… Who is paying????? There is a political problem in Europe as a whole, where the combination of the ageing population combined with increasing demand from the children/young adults and the public sector together can create a political majority for the taxpayers to just pay more and more in pension…. In Denmark already today the population of non-contributors exceeds the taxpayers by more than 10% All European countries have a deficit of young people capable of paying taxes in the future (=YOU)

The future?? ?????

Challenges to the Danish Pension system Widening gap between rich and poor Increasing retirement age means fewer years in retirement (among the lowest in EU) Politicians cannot keep their hands off… - “The best way for Denmark to maintain its pension systems is by not trying to fix a system that isn't broken” Example: As a consequence of trying to cut down on pensions/social benefits for all, a nurse on part-time or full-time receive only 100 Euro less per month after taxes and social benefits (pension, housing allowance etc.) – so who can be bothered to work more…? Mercer – further improvements: raising the level of household saving Better protection of the interests of both parties in a divorce increasing the labour force participation rate amongst older workers providing greater protection of members’ accrued benefits in the case of fraud, mismanagement or provider insolvency. Demographic development – older voters can vote for higher pension….

Denmark – Challenges – cont. Lower contributions (changes to types of pension and tax deductions) and lower returns on active investments (low growth in EU) will affect their future contribution to adequacy. However, the maturation of occupational pensions should raise the future adequacy of pensions. Sustainability will depend on further progress in efforts aimed at increasing participation and employment rates of older workers and of 1st and 2nd generation immigrants. Is still a distance from achieving an appropriate balance between working years and years in retirement. Since the financial crisis and a change to a social democratic government, the budget position changed from many years of surplus to consecutive years with a considerable deficit. The newly adopted reforms hope to be able to provide positive budgets without having to affect pensions.

Challenges to the Portuguese Pension system The main crisis impacts on the Portuguese pension system concern the weakening of public finances. Pension spending has been a major driver of rising government expenditure in Portugal since the mid-nineties. However, the projected increase in pension expenditure over the long-term at 2% of GDP is somewhat lower than the EU average Significant growth in the number of pensioners Simultaneously, the average pension outlay due to the longer career contribution of new retirees are responsible for the increased spending on pensions. To reduce old age poverty further, a new tax financed social benefit – Solidarity Supplement for the Elderly – has been implemented.

Portugal - Challenges Increases in participation rates for older workers Generally: to promote longer working life An immediate challenge is also to comply with the current legal retirement age set at 65 years. Create more incentives towards the development of supplementary pension schemes. In the sense that replacement rates in public provision is dropping markedly, hopefully people will see the need for the development their private pension provision, allowing this to compensate for the expected decline in state pension. Demographic issues???? How do you encourage young people to get more children, when housing situation and unemployment situation is poor?

Interesting readings: Joint Report on Pensions : Progress and key challenges in the delivery of adequate and sustainable pensions in Europe – Nov 2010 http://ec.europa.eu/social/main.jsp?langId=en&catId=752&newsId=958&furtherNews=yes Joint Report on Pensions Progress and key challenges in the delivery of adequate and sustainable pensions in Europe - Country profiles – Nov 2010 Choose: DENMARK and PORTUGAL http://ec.europa.eu/economy_finance/publications/occasional_paper/2010/pdf/ocp71_country_profiles_en.pdf Pension calculator: http://money.guardian.co.uk/calculator/form/0,,603163,00.html http://www.pensioncalculator.org/ http://www.oecd.org/els/public-pensions/pensionsataglance2011retirement-incomesystemsinoecdandg20countries.htm http://www.oecd.org/denmark/47272339.pdf http://www.oecdbetterlifeindex.org/countries/denmark/