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Ministry of Social Affairs, file nr.

040-267
Ministry of Finance
Ministry of Economic and Business Affairs
Ministry of Employment
13 September 2002

National strategy report on the Danish pension system, 2002


1. Introduction
In December 2001, the Laeken European Council adopted a strategy for implementing the open
method of coordination in the area of pensions. Eleven objectives to secure the sustainability of pension
systems were also adopted. Taking into account these overall objectives, member states must present
their national strategy reports for pensions before 15 September 2002. This report is the Danish
contribution.
The 11 objectives are stated in Appendix 1, which contains a point-by-point summary of the report.
The Danish pension system is assessed as well-balanced and able to secure present and future pensioners adequate coverage. If the aim of reducing general government debt is also achieved, fiscal policy and
thus the organisation of the pension system is assessed to be robust in relation to the ageing of the
population. Hence, no major adjustments in the systems are planned at present.
In recent years, the Danish pension system has undergone a number of changes. For example, labour
market pensions and supplementary pension schemes administered by ATP have become more
prevalent, the anticipatory pension system has been reformed and older persons now have stronger
economic incentives to remain in the labour market. These changes have made the system more robust,
for example in relation to the demographic challenge.
The pension system and overall fiscal policies cannot be assessed independently. The standard of living
and the replacement rate provided by the pension system must be seen in conjunction with the fact that
a substantial part of total public consumption is aimed at the older part of the population. Similarly, the
long-term requirements to fiscal policy must be considered in view of the facts that public pensions are
financed on a pay-as-you-go basis, and that large government assets in the form of deferred income tax
payments have accumulated in the savings-based pension schemes.
Therefore, general government debt must continue decreasing at the present rate for the
pension system to be financially sustainable in the long term. The Government aims to maintain
an average surplus on general government finances of 1-2 per cent of GDP up to 2010.
This will secure a sustainable fiscal policy due to the reduction of public debts.
To support debt repayment and make space for lower taxes and a certain rise in public consumption per
user, labour market reforms are being considered that may help increase the labour force and further
reduce unemployment. Specifically, the aim is to raise employment by 87,000 persons from 2000 to
2010, for example by better integrating immigrants, getting students through the education system faster

and giving young people better financial incentives to seek employment in the labour market. This is an
ambitious goal, since labour market participation in Denmark is already high by international standards
and higher than the common objectives set in Lisbon.
The Danish pension system is based on three pillars, each having its own main goal consistent with
those proposed by the World Bank. The first main goal is to secure a decent minimum standard of living for all citizens. Public old-age pension performs this function, with supplementary, typically incomerelated, benefits granted to all citizens irrespective of their previous labour market attachment. The second main goal is to secure citizens a reasonable replacement rate when they enter retirement. Labour
market pension schemes perform this function and presently cover the majority of wage earners. The
third main goal is to ensure flexibility, i.e. the ability to allow for individual requirements. This task is
realised through a wide range of different offers from insurance companies, etc., within the framework
of relatively favourable tax rules. Additionally, there are a number of supplementary pension schemes
(ATP, SP, SAP) that cannot definitely be placed within one of the three pillars. ATP, SP and SAP also
cover certain recipients of transfer payments, thus enabling them to save up for supplementary pension
in a period when they pay no contributions to labour market pension schemes.
In the Danish pension system, public old-age pension is financed on a pay-as-you-go basis, while the
supplementary pension schemes (labour market pension, etc.) are contribution-defined and savingsbased schemes. Savings-based schemes help reinforce the system in the face of demographic outlooks.
The existing labour market pension schemes are characterized by being based on collective insurance
and compulsory membership of a specific scheme.
In 1997, public old-age pension accounted for some 51% and in 1998 for some 50%, of pensioners
gross incomes, and constitutes their main source of income. If the present rules are maintained, future
pensioners can look forward to significant increases in income, because public pensions are adjusted on
the basis of trends in wages, and because the groups incomes will rise due to the greater prevalence and
expansion of supplementary pension schemes. In 2045, however, public old-age pension will still
represent the chief source of income for the 50 per cent of pensioners with the lowest incomes.
With the current rules, the anticipated rise in life expectancy will also mean that citizens will receive
public old-age pension, etc., for a greater part of their lives. Consequently, in reality, the coverage period
of public old-age pension will be longer, thus increasing government net obligations, since the effective
age of retirement cannot be expected to rise in step with rising life expectancy.
The greater prevalence and expansion of the labour market pensions means that, in the future, pillar 2
pensions will carry more weight in the overall pension system. Thus, fewer pensioners will experience a
significant decline in income when they start receiving pension payments. The average replacement rate
(a persons total income after tax as a pensioner compared with the persons income after tax in the last
year as actively employed ) is estimated to rise from the present 74 per cent to 90 per cent in 2045. The
replacement rate is anticipated to rise for low- and middle-income groups in particular, because these
groups have most recently set up pension schemes. Consequently, there is reason to expect that income
distribution among pensioners will be more even in 2045 than today.
The distribution of consumption opportunities between future pensioners as well as the decision to
retire depend on the trends in labour market pensions, but also on future pensioners net asset position,
including that the build-up of the savings-based schemes will in all likelihood crowd out other savings,
not least in the high income groups.

Finally, the aims are to make the pension system more transparent and flexible, and to ensure that the
individuals freedom of choice in relation to the pension system is not hampered unnecessarily. Today,
there are limitations for the individual person as to possibilities of influencing his/her pension scheme
and of making individual choices. The Government wants individuals to exercise greater influence on
the investment and management of their pension savings.
Security is high for pillar 2 and pillar 3 pensions, since they are savings-based and covered by investment
and diversification rules as well as by the financial supervision of pension institutions. A majority of the
political parties made an agreement in 2000 to the effect that public old-age pension should form the
sound foundation for present and future pensioners.
The changes made in the overall pension system during the past couple of decades have necessitated
heightened focus on the interaction between individual schemes and the need to look at individual
schemes and any changes therein in relation to the overall pension system.

2. The present pension system


The Danish pension system encompasses a number of statutory pension schemes (public old-age
pension, ATP, SP, SAP, civil service pension for central government employees), labour market pension
schemes and individual pension savings plans.
The public pension system is targeted at ensuring all citizens a pension (public old-age pension)
irrespective of their former attachment to the labour market. Public old-age pension as well as the
possibility of receiving a number of supplementary, typically income-related, public benefits is intended
to prevent poverty in old age for all citizens. Public old-age pension is assumed to continue being the
sound financial foundation of old age, on the basis of which individuals can plan their life in retirement.
The mainly PAYG-financed public pension system should be seen in the context of the greater
prevalence of savings-based pension schemes during the past decades, especially the labour market
pension schemes, which presently cover most of the Danish labour market. The savings-based schemes
involve higher replacement rates when citizens shift to pension income, but typically also involve certain
insurance benefits providing protection against special risks. Finally, a number of tax-privileged
possibilities for building up individual pension savings contribute to flexibility as regards meeting
individual requirements for replacement rate, etc.
In figure 2.1 the Danish pension schemes are broken down by the three pension pillars, each having its
own goal and administration:

Figure 2.1. Contents of the pillars when taking the multipillar approach
Pillar 1
Publicly administered schemes.
Mandatory

Pillar 2
Privately administered schemes.
Mandatory

Pillar 3
Privately administered schemes
with voluntary contributions

Goal

Redistribution, prevent poverty

Savings and replacement rate

Savings and flexibility

Method

Same benefit to all citizens


or
Income-related benefit
or
Guaranteed minimum pension

Personal pension scheme


or
Pension scheme in relation to
employment

Personal pension scheme


or
Pension scheme in relation to
employment

The
Danish
system

Public old-age pension

Labour market pensions

Individual pension savings

ATP
Civil service pension
SAP
SP

Public old-age pension. Public old-age pension is a pillar 1 pension scheme. It is a basic,
statutory retirement pension granted to all citizens from the time they turn 67. The official
retirement age will be reduced to 65 in 2004 with effect for persons born on 1 July 1939 or later.
Calculated before tax, the pension amounts to DKK 105,400 (EUR 14,190)1 for a single
pensioner in 2002. For a married or cohabiting pensioner, the pension amounts to DKK 77,200
(EUR 10,390). A personal allowance, granted on the basis of a needs assessment, may be added
to the above amounts. The pension should be seen in conjunction with a number of other
government, expense-related allowances and free services that public old-age pensioners can
receive. In 1999, public old-age pension for a single person with no other income corresponded
to 47 per cent2 of an average workers wage (after tax). The size of the pension is independent of
the recipients previous attachment to the labour market, but depends on the pensioners
present income and marital or non-marital relations. The pension is adjusted annually on the
basis of wage trends in the private sector. Eligibility for public old-age pension is based on time
of residence in Denmark. Public old-age pension is financed on a PAYG basis.
The Labour Market Supplementary Pension Scheme (ATP). ATP is a statutory,
supplementary pension scheme. ATP is a mandatory scheme covering all wage earners, etc.,
including certain groups of transfer payment recipients. ATP is meant to ensure all wage earners,
etc., a savings-based supplement to public old-age pension, depending on the scope of their
previous employment. The ATP contribution depends on the individuals scope of employment
and typically amounts to DKK 2,684 (EUR 361) annually for a full-time employee, equal to 1
per cent of an average employee income. ATPs Board of Directors and Council, which are
composed by representatives from the social partners, decides the size of the contribution. ATP
cannot unambiguously be placed as a pillar 1 or a pillar 2 pension. As a statutory scheme with
very broad coverage ATP can bee seen as belonging primarily to pillar 1 pensions. The
institutional set-up of ATP and way of financing nevertheless also links it to pillar 2 pensions.

Rate of exchange: EUR 100 = 743 DKK


Cf. Elements of Social Security. Hans Hansen, the Danish National Institute of Social Research, February 2002. A personal
allowance of DKK 2,300 (EUR 310) is included.

1
2

The Special Pension Savings Scheme (SP). SP is statutory, supplementary pension scheme.
The objective of SP is to increase savings, but it also helps ensure all wage earners, etc. a higher
pension, depending on their previous earned income. SP is a mandatory scheme covering all
wage earners, etc., and groups of transfer payment recipients. The SP contribution amounts to 1
per cent of earned income. The SP legislation was changed in 2002 to the effect that SP became
a savings-based scheme without any redistribution. Thereby the SP scheme became a more
unambiguous pillar 2 pension but as a statutory scheme with a broad coverage it has
characteristics in common with pillar 1 pensions as well.
The Labour Market Supplementary Pension Scheme for Recipients of Anticipatory
Pension (SAP). SAP is a statutory, supplementary pension scheme for recipients of anticipatory
pension. SAP is a voluntary scheme. The objective of SAP is to give recipients of anticipatory
pension access to a labour market pension-like supplement to public old-age pension. The SAP
contribution amounts to DKK 4,320 (EUR 581), corresponding to 2.8 per cent of the
anticipatory pension for a single person. The contribution is adjusted on the basis of wageincreases in the labour market. The scheme falls under pillar 2 pensions, but have also
characteristics common with pillar 1 and 3 pensions.
Civil Service Pension Scheme. This is a labour market pension scheme for public sector
employees, i.e. a pillar 2 pension. For public servants in central government, the scheme is prescribed by statutory law, while, for local authority officers, it is laid down in pension regulations.
Thus, civil service pension also shares features in common with pillar 1 pensions. Unlike most
agreement-based labour market pension schemes, civil service pensions are defined benefit pension schemes, since benefits are calculated on the basis of the previous pensionable salary and
years of service upon retirement. The pension is financed by central government, or the county
or local authority on the basis of current revenue, i.e. tax. The Civil Service Pension Scheme is
the only labour market pension scheme not based on prior savings. However, most local authorities and a few counties have hedged their commitments by taking out insurance in Municipal Pension Insurance Company Limited, KP, to which the local authorities currently pay premiums. Payments from KP thus cover these local authorities expenditure on payments of civil
service pensions. The importance of the Civil Service Pension Scheme will diminish in central
government administration, since central government employees increasingly come under
contribution-financed and contribution-defined schemes that are consistent with the more
flexible and individual forms of pay implemented in the public sector.
Labour market pension schemes. Labour market pension schemes are pillar 2 pensions. They
are mandatory for individual persons and linked to employment. The mandatory affiliation
means that individuals can take out labour market pensions entirely or partly without having
their health assessed, and at costs that, on average, are more advantageous than can be obtained
on their own. The agreement-based labour market pension schemes are set up on the basis of
agreements made between the social partners or in the enterprises. A distinction can be made
between agreement-based schemes agreed between employers associations and trade unions, on
the one hand, and schemes agreed in individual enterprises, on the other hand. Life insurance
companies or pension funds administer both types of schemes. The bulk of labour market
pensions are contribution-defined, i.e. the size of benefits depends on the contributions paid
and the interest earned on them as well as on the insurance risks associated with death and
disability. Retirement pensions in these schemes are based on prior savings. Almost 82 per cent
of full-time employees between the age of 25 and 59 paid contributions to a labour market
pension scheme in 1998. In addition, some wage earners who did not pay in 1998 may have paid
in previous years. From 2004, the contribution will typically amount to 8-16 per cent of the
wage.

Individual pension savings plans. These are individual pension schemes set up with banks,
insurance companies or pension institutions. About 1.1 million persons pay contributions to
such schemes. They are pillar 3 pensions. Generally, the same supervision rules and tax conditions apply to individual schemes and labour market pension schemes. As in the labour market
pension area, individual pension schemes can generally be divided into schemes with current
benefits to the persons entitled to pension, annuity pension schemes, and capital pension
schemes where the capital is paid as a lump sum.

The weight of individual schemes in pensioners total earnings appears from table 2.1. The figures are
for 1998, and thus a long time before the labour market pension system shows full impact.
Table 2.1. Weight of individual schemes in pensioners total income, 1998
Pension scheme
Percentage made up of individual pension
schemes in a pensioners (over the age of 67)
income in 1998.
Public old-age pension
49.6
ATP
2.4
SP
SAP
Civil service pension scheme
8.8
Labour market pension scheme
12.1
Individual pension savings plan
Other income
27.0
Note: SAP enters into force on 1 January 2003. SP entered into force on 1 January 1999.
Source: Contribution from Denmark to the questionaire on safe and sustainable pensions, February 2001.

Pension payments are taxable (payments under a capital pension scheme are subject to a tax of 40 per
cent of the one-time payout). This should be seen in conjunction with the fact that contributions to
pension schemes are deductible when taxable income is calculated. Pension asset returns have been
subject to taxation since 1982. As from 2001, pension capitals saved up are subject to a return-on-capital
tax of 15 per cent of the return on bonds, as well as on shares.
2.1. Most recent changes in the Danish pension system
A number of changes in the Danish pension system have been implemented in recent years, including
changes with significant consequences for the importance of individual pillars in the overall pension
system. Furthermore, the retirement system has been reformed for the purpose of giving older persons
more incentive to continue working.
Overall, the above changes have made the pension system more resilient to the consequences of a
growing population of older persons. Since public pensions and other general government expenditure
on older persons, for example in the form of care and health care benefits, are financed on a PAYG
basis, ageing will continue to place heavy demands on economic policy; see Chapter 4.
2.1.1. Old-age and anticipatory pension and VERP
In 1999, a change in legislation reduced the public old-age pension age from 67 to 65, with effect from 1
July 2004. Moreover, the means testing of public old-age pension was eased as regards income from
work. The changes formed part of a reform of the voluntary early-retirement pay scheme.

The voluntary early-retirement pay, or VERP, scheme is a labour market policy measure allowing persons with long-term labour market attachment (now 25 years membership of an unemployment insurance fund) to retire and receive a mainly publicly financed allowance between the age of 60 and 65. The
purpose of the reform was to provide financial incentives for older persons to remain in the labour
market and facilitate the option of gradual retirement. The reform of the VERP scheme included: the
introduction of a special tax-exempt premium for people who postpone entering voluntary early
retirement; the means testing for all forms of pension savings in the early-retirement benefit, where
previously only certain types of current pension payments were set off; easier means testing for pension
savings when the shift to the early-retirement benefit is postponed; and greater flexibility as regards
work in the VERP period.
The reform led to a fall in the implicit tax on continued work (amount of pension, etc. lost in connection with a persons continuing to work compared with his/her wage) from age 60 up to and
including age 66. The fall was in the order of 10-15 percentage points (see A Sustainable Pension
System, The Government, 2000).
The reduction of the official retirement age (in connection with the VERP reform) is not estimated to
affect the effective supply of labour to any considerable extent. The average retirement age as calculated
by Statistics Denmark was 61,5 years in 2000. This is considerably below the official retirement age of
67, one reason being the VERP scheme. Nor are there signs of any noticeable fall in the labour force
participation rates for the years around the official retirement age, which may be because means testing
rules are much more favourable for public old-age pensioners than for recipients of early-retirement
benefits. As expected, the VERP reform has caused a fall in the share of 60-61-year-olds shifting to
VERP.
Following a change in legislation in 2002, the anticipatory pension system was reformed with effect
from 2003. The reform includes a number of initiatives making it more attractive to employ persons
with reduced capacity for work. The reform significantly simplifies the anticipatory pension system. The
main purpose of the reform was to ensure that people who have (residual) capacity for work are actually
given a chance to prove their ability in the labour market, possibly through a government-supported
job. Consequently, the reform will result in a lower influx of new anticipatory pensioners than would
otherwise have been the case. In recent years, changed practices have helped reduce the influx to the
anticipatory pension scheme.
2.1.2. ATP, SP, SAP
In 1993, the ATP scheme was extended to include transfer payment recipients. As from 1997, a double
contribution is paid for recipients of unemployment, sickness and maternity benefits. With effect from
1997, the scheme was further extended to include recipients of cash assistance and rehabilitation
benefits, and recipients of anticipatory pension and early-retirement benefits also became able to make
voluntary payment contributions. Transfer payment recipients pay only one third of the contribution
themselves.3
The ATP scheme was changed with effect from 1 January 2002 to the effect that in the future, pension
rights will be calculated on an age-dependent basis. The individual benefits will hereafter better reflect
the value of the contributions.

In the voluntary scheme, members pay 50 per cent of the contribution. As part of the anticipatory pension reform, this
share is reduced as from 1 January 2003 to one third of the full contribution for anticipatory pensioners.

The SP scheme was changed in 2002, so that in the future a persons contributions will be added to
his/her savings in the scheme. Consequently, redistribution no longer takes place. Pension rights were
formerly awarded on the basis of the scope of employment.
2.1.3. Labour market pensions
The greater prevalence of labour market pension schemes and the ongoing build-up of these schemes
(larger contributions, etc.) mean that most future pensioners will receive supplementary labour market
pension in addition to public old-age pension. Before the labour market pension schemes became more
prevalent in the late 1980s, only some 30 per cent of employees were covered by a labour market
pension scheme. Now, some 82 per cent are covered. The general consensus has been that greater
prevalence and expansion of the labour market pension schemes was desirable. The establishment of
the labour market pension schemes in the above form was meant to take the following objectives into
account:

Achieving adequate social security in connection with old age, sickness and death. Labour market pension
schemes are a supplement to public pension schemes, and the objective was to ensure that a
persons standard of living as a pensioner is commensurate with the persons previous standard
of living when he/she was actively employed. Consequently, the schemes focus on life-long
benefits in connection with old age and disability.
Securing individual persons benefits that are independent of individual risks. The labour market pension
schemes are constructed as collective insurance schemes, ensuring individual persons benefits at
a price that is often independent of the individuals risk in connection with death and disability.
In the agreement-based schemes, importance is also attached to allowing individual members to
be admitted without meeting any, or only minor, health requirements.
Ensuring high prevalence of the schemes.
Obtaining a high degree of security and predictability as regards the size of benefits. Predictable benefits are
ensured by having the schemes build on guaranteed minimum benefits of which future
recipients are currently informed.
Securing the greatest possible return for the benefit of members.
Securing low costs for the benefit of members.

2.2. The level of public old-age pension


Public old-age pension secures all older persons a basic income that, politically, is considered fair. The
level should be seen in view of the fact that public old-age pensioners are entitled to a number of special
benefits (favourable housing benefit rules, heating benefits, health allowances, reduced tax on owneroccupied housing), most of which depend on the individual pensioners income and assets.
Furthermore, particularly disadvantaged pensioners may be granted a personal allowance following a
specific, individual assessment of their needs. The public pension system should also be seen against the
background that pensioners are entitled to a number of free services, such as home help and hospital
treatment. For example, some 50 per cent of all citizens aged 80+ receive home help.
A great majority of the political parties made a political agreement in 2000 to the effect that public oldage pension should be the sound foundation for present and future pensioners. The agreement states
that, when planning their pension savings, people must be able to know that the rules for the taxfinanced public old-age pension are the solid foundation on which they can build.

Public old-age pension is adjusted on the basis of wage increases in the labour market.4 The adjustment
of public old-age pension, the relatively simple calculation principles and the political agreement on
public old-age pension give individual citizens security and transparency in relation to the level of public
old-age pension they will receive when retiring, and thus also in relation to the standard of living
rendered possible.
Expanding the ATP scheme to include persons who receive transfer payments from the government
has meant that individual citizens receive an ATP pension of a certain size as a supplement to public
old-age pension. In the case of labour market pensions no pension contributions can be paid in
connection with unemployment, etc.
The proportion of public old-age pensioners in 2000 with an income of less than 50 per cent of the
median income for persons under 67 is 2.7 per cent. This is a very small proportion by international
standards.
2.3. Persons without pension savings and with a low replacement rate
Today, only relatively few people have no pension savings and may experience substantial changes in
their standard of living on shifting to pension income. This is partly a consequence of the greater
prevalence of the ATP scheme during the last few years, which has strengthened the basic pension
coverage in Denmark, as mentioned above.
In 1996, some 15 per cent of all 50-year-olds made no supplementary pension savings (besides savings
in the ATP) within the past ten years.
A considerable proportion of these people are persons with no employment, for example unemployed
persons and anticipatory pensioners, who will typically have a high replacement rate when shifting to
public old-age pension. For unemployed people, increased contributions to ATP are being made (since
1997), the purpose being to compensate partly for the shortfall in savings in a labour market pension
scheme during unemployment. For anticipatory pensioners the contribution to the ATP scheme is made
compulsory for the new anticipatory pensioners from January 2003. The Governments efforts to
ensure a higher rate of participation in the labour force may help reduce the size of the group with no
pension savings.
The pension savings of an estimated 2.1 per cent of those aged 40-49 are so small that unless these
people change their behaviour, the replacement rate is estimated to be less than 50 per cent when they
start receiving public old-age pension. One quarter of the above persons will have been self-employed
and do not necessarily have a pension problem since their businesses may represent accumulated
wealth. The remaining persons may also be saving up in other ways, for example by owning their
homes. The figures given also overestimate the group, since the SP scheme had not been initiated in the
analysis year, and since the analysis only considered contributions in a single year. Thus, about half of
the 50-year-olds with no savings other than ATP in a single year have paid contributions to a pension
savings scheme during the previous nine years.
The number of persons without pension savings and with a low replacement rate is thus modest. Periods without pension savings (because of unemployment, etc.) and the difficulties involved in precisely
predicting the income a person will have as a pensioner may mean that the total pension amount will be

The adjustment of public old-age pension, etc., is described in box 3.1.

smaller (or larger) than originally expected and desired. For this reason, paramount importance is being
attached to securing high and rising employment and greater transparency in the pension system.
2.4. Gender equality
The rules concerning public old-age pension do not distinguish with respect to gender. Thus, the same
amount of public old-age pension is paid to men and women; the age limit is the same, etc. The same
applies to the public pension schemes ATP and SAP. In these savings-based schemes, pension rights are
earned on the basis of a unisex principle5, which is an advantage for women because of their longer life
expectancy. SP is a purely savings-based scheme with no redistribution.
The weight of public old-age pension in the Danish pension system helps equalise men and womens
financial circumstances as pensioners. Thus, womens typically lower total time of employment during
their working years and lower wage have a smaller impact on their financial circumstances as pensioners.
In addition, women receive pension for a considerably longer period as a result of their longer life
expectancy.
Nor do the labour market pension schemes distinguish with respect to gender. The schemes are
savings-based and the calculated pension rights are also calculated on a unisex basis. However, no
pension rights are awarded during periods without contribution payments, for example in connection
with unemployment or maternity without wage, which affects women more than men.
Concerning the individual pension schemes there are no requirement for a unisex basis.
As the labour market pensions are expanded, pensioners financial circumstances will increasingly reflect
labour market differences (i.e. with regard to wage and to periods outside the labour market) and the
consequential differences concerning the pensioners own savings in the labour market pension
schemes. On average men have a higher annual income and a higher labour income which means that
other things being equal they will accumulate more savings in the labour market pension schemes.

3. Incomes of future pensioners

The current rules mean that in 2045, pensioners financial circumstances will automatically have improved because of the general growth in productivity. This is because transfer payments, including
public old-age pension, are adjusted on the basis of wage increases in the private sector; see box 3.1. The
indexation rules thus imply that productivity improvements generate a general rise in the standard of
living for people in the labour force as well as pensioners. Furthermore, the expansion of the labour
market pensions will lead to higher incomes for pensioners.
Box 3.1. Adjustment of pension transfers.
The rates for different types of transfer payments (and the progressive limits, etc. in the tax system) are automatically adjusted once a year on the basis of wage increases in the private sector (the area covered by the Danish Employers
Confederation). Transfer payments are adjusted using the rate adjustment percentage; cf. the Rate Adjustment Percentage
Act.
The rate adjustment percentage for a given fiscal year is determined on the basis of wage trends in the wage year, which is
the year two years before the fiscal year. The rate adjustment percentage for 2003 has thus been fixed on the basis of the
wage increase from 2000 to 2001. Wage increases are assessed on the basis of the Structural Statistics compiled by the
5

Application of the same death probabilities for men and women.

10

Danish Employers Confederation. In calculating the annual wage for blue- and white-collar workers, respectively,
inconvenience payments, pay during sickness absence, etc., and pension contributions in the relevant year are excluded.
Moreover, labour market contributions are deducted simultaneously in relation to the fiscal year, since transfer payment
recipients do not pay labour market contributions. The annual wage for blue- and white-collar workers is co-weighted, and
only wage information from firms that have reported to the statistics in both years (identical businesses) is used.
If the rise in annual wage is above 2.0 per cent, an amount corresponding to the rise in annual wage is 2.0, but not more
than 0.3 per cent, is applied for a pool amount. The rate adjustment percentage is equal to the rise in annual wage minus the
percentage rate set aside for the pool amount. The pool amount is used for financing various initiatives to the benefit of
transfer payment recipients.
In the calculations referred to in the text it is assumed that the funds transferred from the rate adjustment pool are
retransferred to the pensioners in the form of a pension increase. In the calculations, public old-age pension is thus
adjusted in step with wage increases.

The report A sustainable pension system, The Government, 2000, includes calculations illustrating
the possible income levels and distribution for future pensioners. The calculations are based on
information from 1997-1999. Since the report was prepared, collective bargaining has taken place (in
2000), resulting in quicker and, for some groups, greater expansion of the labour market pensions than
assumed in the calculations. Moreover the results shall be seen in light of the fact that no allowance is
made for the reorganisation of SP and ATP, a fact affecting the results; see below.
It appears from the report that if productivity and real wages in the private sector rise by 1.5 per cent
annually, and tax rates, etc. are maintained, then disposable real income for an average pensioner can be
about 2 times higher in 2045 than in 1997. The real value of public old-age pension alone is estimated
to rise by 75 per cent, while the calculated actual payments from the labour market pension schemes
almost quadruple. Overall, the average pensioners disposable income will thus rise by almost 20 per
cent more than wages in the same period, mainly due to the expansion of the labour market pension
system through the past decades.
Table 3.1. The average financial position of a pensioner in 1997 and 2045.
Amount in DKK 1,000/
1997
2045
(EUR 1,000)
.
(1997 wage level)
Public old-age pension
69 (9)
58 (8)
Pension payments
36 (5)
65 (9)
ATP and SP
5 (1)
25 (3)
Capital income
24 (3)
15 (2)
Total income
134 (18)
163 (22)
Tax
40 (5)
49 (7)
Income after tax
94 (13)
114 (15)
Housing subsidy, etc.
4 (1)
3 (0.4)
Disposable income
97 (13)
116 (16)
Potential wealth consumption
23 (3)
15 (2)
Resulting disposable income
121 (16)
132 (18)

2045
(1997 price level)
122 (16)
136 (18)
53 (7)
31 (4)
341 (46)
103 (14)
238 (32)
5 (1)
243 (33)
32 (4)
276 (37)

Source: A sustainable pension system, The Government, 2000.

Labour market pensions and the payments from ATP and SP will make up an increasing proportion of
pensioners total incomes. This is because these payments grow faster than wages, and thus than the
indexation of public old-age pension, and the rules for means testing of the public old-age pension
supplement. Overall, the various savings-based schemes will thus be at least as important to pensioners
income as public old-age pension in 2045.

11

Besides current income, pensioners also have the possibility of gradually reducing and thus consuming
their wealth, as their residual life expectancy falls. Consequently, potential wealth consumption can be
included in the statement of pensioners financial circumstances. The report assesses pensioners
potential wealth consumption to grow by some 1/3 less than wages. This shall be seen in the light of
the fact that accumulation of labour market pensions is assumed partly to reduce the accumulation of
other assets. The assumptions concerning savings behaviour are uncertain and are inherently of great
importance to future pensioners overall private consumption possibilities, which, besides incomes, also
depend on the pensioners overall wealth position.
Public old-age pension is the main source of income for present pensioners. Still, the overall average
income of pensioners is presently somewhat higher than the public old-age pension, because of returns
on assets and supplementary pension payments. However, not all pensioners receive supplementary
pension payments. Only some 30 per cent of present pensioners receive payments over DKK 20,000
(EUR 2,692) from supplementary pension schemes6.
As mentioned above, public old-age pension will generally make up a falling proportion of pensioners
incomes up to 2045, but for the 50 per cent of pensioners with the lowest incomes public old-age
pension will remain more important to their income than all the various supplementary pensions put
together; see figure 3.1.
Figure 3.1. Composition and size of pensioners gross income in 2045 by deciles of disposable
income
DKK 1,000

EUR 1,000

350

45

300

40

250

35
30

200

25

150

20
15

100

10

50

0
1

10

Decil

Old-age pension
Capital income
ATP and SP

Labour market pensions


Private pension
Housing subsidy

Overall, the calculations thus indicate that the income distribution for pensioners will be more even in
2045 than in 1997, since income rises most steeply for the groups with low and medium incomes, where
labour market pensions have not been expanded until within the recent decades; see figure 3.2. The
Moreover, only some 40 per cent of pensioners receive payments from supplementary pension schemes over DKK 10,000
(EUR 1,346).

12

average disposable income of retirees from the low and medium income groups is estimated to rise 2550 per cent more than average wage in the period until 2045. For groups with higher incomes, the rise is
estimated to be 10-20 per cent. This is because persons in the highest income brackets were already
receiving payments from labour market pensions in 1997, so growth in their incomes in the period until
2045 will be lower.
The likely development towards a more equal income distribution will probably be uneven, since
pension payments to the highly paid must for a period (10-20 years) be expected to rise at a greater rate
than for the low-paid, because the schemes for the high wage segment were started at an earlier point in
time. Furthermore, the results should be seen in light of the fact that such long-term projections are
inherently subject to many uncertainties and sensitive to the choice of assumptions, not least including
trends in real interest rates.
Figure 3.2. Income distribution of pensioners (disposable income in 1997 wage level), 1997 and
2045
Per cent

Per cent

Singles

Per cent

Per cent

Couples

100

100

100

100

75

75

75

75

50

50

50

50

25

25

25

25

0
60

90

0
120 150 180 210 240 270
Disposable income (DKK1,000)

2045 Distribution
2045 Av. disp. income

1997 Distribution
1997 Av. disp. Income

0
90

150

210

270

330

0
390

Disposable income (DKK 1,000)

2045 Distribution
2045 Av. disp. income

1997 Distribution
1997 Av. disp. Income

The increasing supplementary pension payments are raising the average replacement rate defined as a
persons total income after tax as a pensioner compared with the persons income after tax in the last
year as actively employed7. In 1997, the average replacement rate is thus estimated to be some 70 per
cent, of which public old-age pension make up 40 per cent, while the rest is supplementary pensions
and a calculated return on assets. With the assumptions applied, the calculated average replacement rate
will increase to some 90 per cent in 2045; see figure 3.3. Under the current rules for means testing, public
old-age pensions contribution to the replacement rate will diminish in step with the increase in
supplementary pensions. Consumption possibilities are also affected by the development in a persons
other savings, including whether the assumed rise in labour market pensions will crowd out other
savings8.

A persons income when he/she was in the labour force, which is the basis of comparison, corresponds to the persons
income (after tax) in the period before he/she retired i.e. the last period the person was in the labour force adjusted
upwards by the trends in wages. This will affect the replacement rate if some income groups systematically tend to enter
partial retirement.
8 In the calculations it is assumed that the rise in labour market pensions will crowd out other savings by 30 per cent on
average, which generates a relatively substantial savings effect.
7

13

Figure 3.3. The average (after tax) replacement rate 1996 and 2045 by sources of income
Per cent

Per cent

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0
1996

2045

Old-age pension
Note:

Other pensions

Capital income

Other pensions are labour market pensions, ATP and individual pensions. The average of replacement rates for all
wage earners and self-employed persons has been calculated in the figure.

The replacement rates decrease with income; see figure 3.4. In the low deciles of income, the calculated
replacement rate is thus higher than 100. This reflects that public old-age pension, together with the
ATP schemes and the more favourable housing subsidy rules for pensioners, is of great importance to
the low-income groups.
The calculated replacement rates increase for the medium income groups in particular, both for single
pensioners and for couples. The average replacement rate for the medium income groups has been calculated at some 83 per cent for couples and some 94 per cent for single pensioners in 2045. The average
replacement rate for the medium income groups was 60-65 per cent in 1996.
Figure 3.4. Replacement rate in 1996 and 2045.
Per cent

Per cent

Singles

Per cent

Per cent

Couples

200

200

150

150

150

150

100

100

100

100

50

50

50

50

200

6
Decil

1996 Replacement rate

10

2045 Replacement rat e

200

0
1

5
6
Decil

1996 Replacement rat e

10

2045 Replacement rat e

14

In the calculations, the basic and supplement amounts of public old-age pension are adjusted in step
with wage trends, since the contribution to the rate adjustment pool is assumed to be retransferred as
public old-age pension; see box 3.1. However, the pension amounts paid out rise somewhat more slowly
than wage, which is due to the rules for means testing and hence the rise in the disposable incomes of
pensioners. Furthermore, the prospect of longer life expectancy implies that, on average, pensioners will
receive public old-age pension for more years and thus for a greater part of their lives. This involves
larger pension expenditure per pensioner during his/her life, and growing future pension obligations for
the public sector, which tightens requirements for debt reduction in the period until 2010.
In the population projection used it is assumed that the average life expectancy will increase by 4 years
for men and 1 years for women up to 20759. This will extend the period in which persons are entitled
to public old-age pension to 18 years for women and 17 years for men, compared with some 18 and
15 years respectively today; see figure 3.5a.
Applying the current 2002 rules and rates, the amount that a single, female public old-age pensioner
receives over lifetime will go up from some DKK 1.88m to DKK 1.93m before tax (i.e. DKK 52,000 or
EUR 7,000 at 2002-level), while the corresponding figures for a single, male pensioner will go up from
DKK 1.56m to DKK 1.78m (i.e. DKK 220,000 or EUR 29,600); see figure 3.5b.
Figure 3.5a. Number of years a person receives public Figure 3.5b. Amount of pension during the lifetime of a
old-age pension
(single) public old-age pensioner
Years

Years

18,5

18,5

18

DKKm

DKKm

2,0

2,0

1,9

1,9

1,8

1,8

1,7

1,7

1,6

1,6

18

17,5

17,5

17

17

16,5

16,5

16

16

15,5

15,5

15

15

14,5
2005

15

25

35

45

55

65

Number of years a w oman receives old-age pension


Number of years a man receives old-age pension

14,5
75

1,5
2005

15

25

35

45

55

65

1,5
75

Old-age pension per person, women


Old-age pension per person, men

As mentioned above, the labour market pensions have expanded more rapidly and, for some groups,
more greatly than assumed in the report, and the ATP and SP reforms have not been taken into account.
The new SP scheme is a purely savings-based scheme that is not redistributive precisely like DMP,
which was introduced in 1998 and subsequently (in 1999) replaced by the former SP scheme. The
reform of SP impacts on future income distribution in the sense that future payments from the scheme
will now depend on an individuals earnings during his/her working years, while continuing the old rules
would involve some redistribution from high-income to low-income groups. Estimates thus suggest that
the disposable incomes of pensioners in the lowest income deciles would be some 2 per cent higher in

Compared with population projections for the other West European countries and the US, this is a modest projected
growth in average life for women in particular; see United Nations (2001). World Population Prospects, The 2000 Revision,
Highlights Population Division, Department of Economic and Social Affairs, UN, New York.

15

2045 with the old rules than with the new ones. Overall, this does not change the expectation of a trend
towards a more equal income distribution among pensioners in 2045 than today.

4. Ageing and general government finances


Besides transfer payments to older persons, for example in the form of public old-age pension, the
public sector is responsible for major parts of the health care and health care services provided to older
persons. The expenditure incurred in this connection is financed on a PAYG basis. This means that
ageing will put increasing upward pressure on expenditure in future. Moreover, demographic
developments are expected to shrink the labour force in the long term, which will tend to erode the
governments revenue base.
To prepare the Danish economy for the demographic challenge, the Government aims at maintaining a
fiscal surplus averaging 1 2 per cent of GDP up to 2010. This target is assessed to ensure the
sustainability of fiscal policy, so that future generations will not be impelled to introduce fiscal
tightenings because of an accumulation dept burden. The requirement on public finances in order to
ensure robustness in relation to ageing is thus stricter than the targets of close to balance set out in
the Stability and Growth Pact.
The requirement has been calculated on the assumption that the Danish PAYG-financed pensions, including adjustment rules, etc., can be maintained without subsequent tightenings of fiscal policy. Thus,
fiscal policy will be the means by which to secure the sustainability of the pension system, since the aim
of debt reduction creates room for financing the PAYG-financed public pensions for older persons.
The contribution and savings-based pension system is in itself robust in relation to ageing. However, the
expansion of this system has primarily helped reduce the debt reduction requirement to the extent that
PAYG-financed pensions would have been higher in the absence of these savings-based schemes. Also,
a further expansion of the contribution and savings-based pension system would not be expected to
lead to any significant changes in the sustainability requirement on public finances.
The calculated requirement for general government finances is based on an overall assessment of the
public sectors future net obligations, given that current tax rates as well as standards and replacement
rates in public services are maintained. The calculation shows that annual government surpluses must
amount to an average of 2.1 per cent of GDP up to 2010 to ensure a sustainable trend in general
government finances; see table 4.1. This requirement can be divided into three components:
The first component is the future net additional expenditure on pensions, care for older persons, etc.
This corresponds to a permanent net rise in expenditure of 2.7 per cent of GDP.
The second component covers the part of government surpluses stemming from public funds (0.8
per cent of GDP), including ATP. These funds are earmarked for higher pension payments in the
long term and can therefore not be used to finance the future expenditure pressure.
The third component is a correction for the fact that the continued rise in production and the price
level in itself helps reduce general government debt to GDP ratio. This corresponds to a permanent
net reduction in expenditure of 1.4 per cent of GDP.

16

Table 4.1. Long-term requirements for general government finances, % of GDP


Average, 2002-10
Rise in future net obligations1) ....................................................................
2.7
+ Balance in public funds .............................................................................
0.8
+ Erosion of debt because of growth.........................................................
-1.4
= Calculated requirement for government balance incl. funds ..............
2.1
Target for public balance ..............................................................................
1 2
Note:
1)

The calculation is based on a sustainable development in general government finances starting in 2002.
The figures stated are calculated averages for the period from 2002 to 2010 seen as a whole.
This is expressed as an average permanent rise (in per cent of GDP)

The calculation thus supports the medium-term target of securing an average surplus of 1.5-2.5 per cent
of GDP up to 2010. The target for general government finances has been set as an interval because of
the general uncertainty associated with calculating the sustainability requirement.
Pension savings are not income taxed until the time they are paid out. Consequently, the tax value of the
reserves accumulated in the savings-based pension systems reflects a government asset in the form of
deferred income tax payments, which serves to improve government finances as the system matures and
the net payments from the schemes increase. In the calculation, the rise in net payments alone generates
compared with today an improvement of government finances in the order of 2.5 per cent of GDP
in 2045; see 4.1.3. However, this should be seen in conjunction with the fact that the tax-deduction for
pension contributions has historically eroded the governments revenue base, thus increasing
government net debt.
The Government has set up the following key medium-term targets:
Securing a surplus on government finances averaging 1.5 2.5 per cent of GDP up to 2010. This
implies a reduction of about 50 per cent of government debt in per cent of GDP.10
A tax freeze
Expanding employment by 87,000 persons up to 2010.
Within the bounds of debt reduction and tax freeze, the presumed increase in employment will provide
some latitude for limited growth in public consumption per user in the years up to 2010. Moreover,
within a sustainable fiscal policy framework, labour income taxes are assumed to be reduced by some
0.25 per cent of GDP net. This marks the Governments intention to reduce tax on earned income
from 2004, if the necessary fiscal leeway can be found.

4.1. Overall changes in general government revenue and expenditure in the longterm
With the revenue and expenditure rules applied, overall expenditure on general government transfers
and public consumption is estimated to increase by 7.4 per cent of GDP up to 2035; see table 4.2. Of this
increase, increased expenditure on public old-age pension and health-related general government
The sustainability requirements and the target interval set for the government surplus in per cent of GDP have been
reduced by 0.5 percentage points compared with previously as a result of the transformation of the Special Pension Savings
Scheme (SP) into a (mandatory) individual scheme. In popular terms, the reform means that the SP scheme is no longer
counted as part of the public sector. The result is a downward adjustment of the surplus in the public funds, and thus in
general government surplus, of some 0.5 per cent of GDP in the years 2002 to 2010. Since subsequent (net) payments from
the SP scheme will not be included as general government expenditure (but as consumption of private savings), the
requirement for government surpluses is, however, reduced by exactly the same figure, some 0.5 per cent of GDP.

10

17

expenditure represents the main part, with an increase of 5.4 percent of GDP. The rise in general
government expenditure caused by demographic changes will peak around 2035, following which the
upward pressure on expenditure will diminish and stabilise at a level some 5.5-6 per cent of GDP higher
than today.
A considerable contribution derived from the taxation of rising payments from the private pension
sector will add to the revenue side of public finances. The net revenue from such taxes will gradually
increase up to 2040, following which it is projected to make up around 2.5 per cent of GDP. Rising
expenditure on (taxable) transfers on the revenue side will also raise tax revenues. Lower revenues from
corporation taxes and from oil and gas extraction in the North Sea will tend to reduce total tax
revenues. Overall, general government revenue is estimated to rise by just under 3 per cent of GDP
from 2002 to 2035.
Table 4.2. General government revenue and expenditure in the long term, % of GDP
2002 2005 2010 2020 2030 2035 2050
Level ----------- Change compared with 2002 ------------Total general government expenditure,
excl. net interest expenditure...........................
51.3
0.0
1.1
3.0
6.4
7.4
5.5
- Public consumption .......................................
25.5
-0.1
0.0
0.7
2.6
3.4
2.9
1)
- General government transfers ....................
16.6
0.0
1.0
2.3
3.7
4.0
2.6
Total general government revenue .................
54.5
-0.5
-0.1
0.9
2.3
2.8
2.1
1) Before tax. Transfers from social funds (ATP, etc.) are not included.
Source: The Sustainability Projection and the Convergence Programme, January 2002.

Overall, the projection indicates that the net increase in expenditure as compared with 2002 will be
some 4.5 per cent of GDP by 2035 and will stabilise at some 3.5 per cent of GDP in the long term. This
can be converted into a net increase in expenditure of 2.7 per cent of GDP compared with the level in
the period 2002 to 2010 as a whole; see table 4.1.
4.1.1. Expenditure on public old-age pension
The rising expenditure on general government transfers in the long term is primarily due to increases in
public old-age pension.11
General government expenditure on public old-age pension is presently 4.4 per cent of GDP and is, in
step with the rising number of older persons, anticipated to increase gradually by 3.4 percentage points
up to 2035; see table 4.3. Public old-age pension expenditure will thus stand at 7.8 per cent of GDP in
2035, but will subsequently fall slightly to some 7 per cent of GDP in 2050.
Table 4.3. Expenditure on transfers in the long term, % of GDP
2002 2005 2010 2020 2030 2035 2050
Level
----------- Change compared with 2002 ---------General government transfers1) ......................
16.6
0.0
1.0
2.3
3.7
4.0
2.6
Of which public old-age pension....................
4.4
0.2
1.1
2.1
3.0
3.4
2.5
1) Before tax. Transfers from social funds (ATP, etc.) are not included.
Source: The Sustainability Projection and the Convergence Programme, January 2002.

Besides public old-age pensions, the transfers include income-replacing benefits, such as unemployment benefits, earlyretirement benefits, and social assistance.

11

18

It is recognised that a certain decline in income-related allowances will cause the rise in expenditure on
public old-age pension in the long term. The increased decline in these allowances reflects that, on
average, pensioners incomes rise more steeply than the basic amount of public old-age pension, since
payments from funded pension schemes will rise. Presently, about one third of public old-age pension is
granted in the form of income-related allowances.
4.1.2. Expenditure on public services
With the prospect of a growing the number of older persons up to 2040, expenditure due to demographic changes in the area of care for older persons will grow by some 40 per cent, while the
expenditure on health care services will grow by just over 10 per cent; see figure 4.1.
Figure 4.1. Expenditure in key areas due to demographic
changes
Index 2002=100

Index 2002=100

150

150

140

140

130

130

120

120

110

110

100

100

90

90

80

80
05

15

25

35

45

55

65

75

Hospital services

Residential care homes

Child care

Education

General government expenditure on health care and care for older persons is presently 7.4 per cent of
GDP and is, in step with demographic changes, anticipated to increase gradually by 2.0 percentage
points up to 2035; see table 4.4.
Table 4.4. Expenditure on public consumption in the long term, % of GDP
2002 2005 2010 2020 2030 2035 2050
Level
---------- Change compared with 2002 --------Public consumption................................................ 25.5
-0.1
0.0
0.7
2.6
3.4
2.9
Of which health care and care for the elderly.....
7.4
-0.1
0.0
0.6
1.6
2.0
1.8
Source: The Sustainability Projection and the Convergence Programme, January 2002.

4.1.3. Pension assets and taxation of pension payments


The expansion of the contribution- and savings-based pension system, including in particular the labour
market pension schemes, has led to a steep increase in pension assets during the last 10-20 years. Overall, pension assets amounted to just over 100 per cent of GDP in 2000, of which private schemes accounted for three fourths, while the statutory schemes including in particular ATP accounted for the
remainder. Thus, pension reserves have more than doubled since 1987 (measured in per cent of GDP);
see table 4.5.

19

Table 4.5. Assets in pension funds


1986
1990
1995
2000
------------- per cent of GDP ------------20.6
24.4
31.2
43.6
10.3
13.3
16.1
18.8
8.3
11.6
14.2
17.1
39.2
49.3
61.5
79.4
10.6
13.2
16.1
25.4
49.8
62.5
77.6
104.8

Life insurance companies ............................................................


Occupational pension schemes etc. ..........................................
Banks ..............................................................................................
Total non-statutory schemes....................................................................
Supplementary pension schemes (ATP, etc.) 1) .......................
Total......................................................................................................................

1) Including ATP, the Employees Capital Pension Fund (LD), the Special Pension Savings Scheme (SP) and the
Temporary Pension Savings Scheme (DMP), which was abolished and replaced by SP.
Source: The Danish Financial Supervisory Authority and own calculations

It is crucial to include contributions received and payments made from the pension sector when making
a long-term projection of general government finances because of the large scope of pension savings,
and because pension savings are mainly taxed when the pensions are paid out, while contributions to
pension schemes can be deducted from ordinary income tax.
Whether the amount is taxed at the time of contribution or at the time of payment makes little
difference for individual pension savers if the income tax rate is the same at the two dates. On the other
hand, the time of taxation is crucial to the development in recorded general government debt. When the
pension system is being built up, the right to deduct pension contributions leads to a reduction of tax
recipients, which will exert an upward pressure on general government debt. However, this should be
seen in conjunction with the fact that the government is building an implicit asset in the form of
deferred taxes, administered by the private pension sector.
In the long term, the fiscal additional revenue from such net pension payments can compared with
today be estimated to amount to some 2.5 per cent of GDP; see figure 4.1a. This reflects that, from
2004 onwards, pension contributions will equal some 6.5 per cent of GDP, while pension payments will
rise from just over 4 per cent of GDP to 10-11 per cent of GDP in the long term (both figures
calculated before tax). All else being equal, the future increase in tax revenue will benefit general
government finances. However, because the future revenue springs from deferred tax payments, the
general government net debt is also higher today.
Figure 4.1a. Change in revenue from taxation
of net pension payments
%of GDP

Figure 4.1b. Pension assets as well as contributions


received and payments made in the pension sector
%of GDP

3,0

3,0

2,5

2,5

2,0

2,0

1,5

1,5

1,0

1,0

0,5

0,5

0,0

0,0

%of GDP

260

10

240

220

200

180

160

140

120

100
05

-0,5

-0,5
05

15

25

35

45

55

65

75

%of GDP

11

15

25

35

45

Contributions received

55

65

75

Payments made

Pension assets (right axis)

Source: Own calculations.

20

The trends in contributions received and payments made in the pension sector mean that after 2040
total pension assets will amount to more than twice of GDP, which represents a doubling compared
with today; see figure 4.1b.

4.2. Targets for labour force and employment


An important part of the medium-term strategy is the objective of increasing employment by 87,000
persons up to 2010. A rise in the labour force of 67,000 persons will generate the bulk of the increase,
while a further reduction of unemployment is to contribute the remaining 20,000 persons.12
All else being equal, changes in the size and make-up of the population are expected to reduce the labour force by 66,000 persons up to 2010. Consequently, a rise in the labour force of 67,000 persons
implies that employment rates in individual age groups are increased, corresponding to a growth in the
labour force of 133,000 persons; see table 4.6.
Table 4.6. Changes in the labour force, etc. from 2000 to 2010
Employment ...............................................................................................
Unemployment...........................................................................................
Labour force ...............................................................................................
Contribution to increase in labour force:
- Changed demography1) ..........................................................................
- Requirement for increase in activity rates ...........................................
Contribution to increase in activity rates :
- Unrealised requirements .........................................................................
- Implemented initiatives, etc.2) ...............................................................

------------ 1,000 persons ----------87


20
67
-66
133
53
80

1)

The contribution from changed demography has been calculated by keeping the level participation rates
in the labour force, distributed on gender, age and origin, unchanged from the 2000 level.
2)
The contribution is based on an overall assessment of the effects of implemented reforms regarding, for
example, the transitional (early retirement) benefit, VERP and anticipatory pension schemes, including
recent years fall in the influx to the early retirement scheme.
Source: Economic Survey, May 2002.

The possibilities of achieving the rise in activity rates must be seen in light of the reforms implemented
with regard to, for example, the transitional (early retirement) benefit, voluntary early-retirement pay
(VERP) and anticipatory pension schemes. Overall, the influx to these schemes has fallen considerably
since 1996, and the most recent figures show increased activity rates for the vast majority of age groups
between 55 and 66 years; see box 4.1. This has helped reverse the downward trend in activity rates seen
since the end of the 1980s; see figure 4.2a. If the trends in the influx to early retirement, etc. are
maintained at their present lower level, more than half of the required contribution from higher activity
rates up to 2010 will be realised.
The presupposed increase in activity rates for individual age groups and for immigrants will mean that
the overall average activity rate will remain largely unchanged up to 2010. The same is true for emThus, unemployment in 2010 will be reduced to 130,000 persons, or 4.5 per cent of the labour force. This means that
long-term unemployment will largely be abolished, and that unemployment will thus predominantly be of shorter duration,
occurring, for example, in connection with a change of jobs etc. This will place heavy demands on the way the labour market
works. A higher level of education and a more targeted labour market policy will help underpin a long-term unemployment
level of 4.5 per cent of the labour force. If unemployment is to average such a low level, prolonged downturns in the
economy also need to be avoided.

12

21

ployment rates. This is chiefly because older persons in the labour force and immigrants, who have
relatively low activity rates, will carry more weight in future. On the other hand, standardised activity
and employment rates, cleansed of the future change in the make-up of the labour force, will increase13;
see figure 4.2b.
Figure 4.2a. Contribution to growth in the
labour force from change in activity rates
1,000 persons

Figure 4.2b. Activity and employment rates

1,000 persons

30

30

15

15

-15

-15

-30

-30

-45

-45
81 83 85 87 89 91 93 95 97 99

%of the labour force

%of the labour force

82
80
78
76
74
72
70
68

82
80
78
76
74
72
70
68
90 92 94 96 98 00 02 04 06 08 10
Employ. rate
Activity rate

Employ. rate, std.


Activity rate, std.

Note:

In figure 4.2a, the contribution to growth in the labour force from the change in activity rates has been
calculated as the change that would have occurred in the labour force if the size and make-up of the
population were maintained as regards age and gender, given the observed changes in the age- and gender-specific activity rates (from primo this year to the next year). Similarly, the standardised activity and
employment rates in figure 4.2b have been calculated with the same makeup of the population as regards
gender, age and origin as in 2000. The calculations concern persons over 14 years of age.
Source: Register-Based Labour Force Statistics (RAS) and own calculations

Most of the effects produced by the reforms of the VERP and anticipatory pension schemes as well as
recent years fall in the influx to early retirement will occur in the coming years, when the reforms have
been fully phased in and the persons in individual age groups have been replaced by new generations
who will continue working longer. But further structural improvements in the labour market are needed
to attain the medium term labour force target.
In autumn 2002, the Government will present an action plan for More people in work, which will
focus on more flexible measures aimed at finding the fastest way to employment, promoting greater
efficiency in the initiatives to find people jobs and to improving the financial incentives to work.
Furthermore, the Governments integration plan focused on getting refugees and immigrants into work
quickly. Finally, initiatives are being considered to help young people get through the education system
faster.

13

The difference compared with the non-standardised rates thus reflects demographys contribution to the labour force.

22

Box 4.1. Early retirement


For a number of years, the trend in Denmark has been for people to retire from the labour market before old-age pension
age, see figures a and b. Early retirement reduces the labour force (and employment) and places a burden on general government finances through lower tax revenue as well as higher expenditure on transfer payments. This gives the government less
fiscal latitude.
Figure a. Age-dependent activity rates, 55-to-70-yearolds
%

90
80
70
60
50
40
30
20
10
0

90
80
70
60
50
40
30
20
10
0
55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

1998

2001

Figure b. Average retirement age, , 1981-2000


Age

Age

64

64

63

63

62

62

61

61

60

60

59

59

58

58
57

57
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
Women

Men

Note 1: The rise in activity rates for persons between the ages of 66 and 67 should be seen in light of the
calculation method. Thus, by definition, recipients of early-retirement benefits are not included in the
labour force, even if they have other paid employment, whereas old-age pensioners that have a minimum
of 80 hours employment are included in the labour force.
Note 2: Retirement age is calculated for a 50-year-old in the labour market. It is assumed that the labour force
participation rate for 67-years-old is 0. The scope of early retirement was extraordinarily large in 1995
(over 80,000 persons), following which the right to start receiving transitional (early retirement) benefits
was abolished
Source: Statistics Denmark.
The mainly publicly financed possibilities of retirement are part of the reason why the retirement age is 62-63. Generally,
benefits in the public retirement schemes in the form of, for example, early-retirement benefit and old-age pension, are not
or only to a limited extent graded according to the retirement age. (An important exception is the tax-free premium introduced in connection with the VERP reform in 1998 for persons entitled to early-retirement benefit who turn 62 without
having retired from the labour market). This reduces the financial gain that private individuals get from remaining in the
labour market beyond the age that they are entitled to receive benefits from the schemes.

5. Transparency, flexibility and modernisation of the pension


system
As society develops, it must be ensured that the pension system remains capable of satisfying the requirements posed to the system. In this context, it is important to note that changes in one area of the
pension system may impact on other parts of the system. In recent years, attention has focused on the
transparency and flexibility of the pension system. More attention has also focused on individual persons contributory influence on their pension schemes and their possibility of making individual choices.

23

5.1. Individual influence on the pension system


In the occupational pension the trend goes toward furthering individual choice. This is seen both in
relation to the products and the investment strategy.
Today, a person, however, has limited possibilities of influencing his/her pension scheme and of
making individual choices. The Government wants to give individuals the liberty to exercise greater
influence on the investment and management of their pension savings. Similarly, individual persons
should be assured the possibility of transferring their pension scheme without meeting any unnecessary
obstacles. For this reason, the transfer fees, among other things, must be further examined.
Against this background, the Government has set up a committee to analyse the possibilities and consequences associated with giving individual pension savers greater freedom to invest and manage their
pension savings.
As a first step, the committee is to suggest how, from 2003, savings holders in the Special Pension Savings Scheme (SP) can be entitled to transfer their savings, including interest, to another pension scheme.
Together with the reform of the SP scheme, this element forms part of the 2002 Finance Act Agreement. The reform of the SP scheme means that the scheme will be changed into individual pension
savings in line with the original temporary pension savings scheme from 1998. Consequently, the redistribution from crediting contributions that took place under the current rules will cease.

5.2. Information about and security of pension schemes


5.2.1. Information about and transparency of pension schemes
Fully understanding the rights and obligations under a pension scheme can be difficult. Consequently,
an order on duties of information has been issued concerning life insurance companies and lateral
pension funds, which together manage most individual and occupational pension schemes in Denmark.
This order directs life insurance companies and lateral pension funds to give policyholders and members
adequate information about their rights and obligations. This duty of information applies both before
and during the term of the pension scheme. The pension institutes have an interest in providing the
necessary information to members and customers and do therefore provide information beyond the
statutory requirements.
As regards company pension funds, no special information requirements currently apply in relation to
members of these schemes, but such rules are expected to be introduced soon. Company pension funds
will be covered by the coming pension fund directive, which lays down some very comprehensive
requirements for information to members. These rules will be implemented into Danish law.
Another element of transparency is for savings - in the scheme to which contributions are made - to be
managed and to carry interest effectively as compared with other schemes. To facilitate comparisons between different institutes, the Danish Financial Supervisory Authority publishes a number of key
performance indicators calculated on a uniform basis in these areas.
On a future-oriented level, efforts are also being made to procure a key performance indicator for the
distribution of the realised result between policyholders/members and owners. The objective is to
enable policyholders and members to see the maximum target for return on equity versus the return on
equity actually achieved year by year in the companies. The Financial Supervisory Authority will publish

24

the figures on an ongoing basis, so that individual policyholders/members can compare and assess the
schemes.
5.2.2. Security
The security for the subsequent right to pillar 2 and pillar 3 pensions widely stems from the fact that the
money is set aside to cover the earned pension rights. In pension schemes, which are pure savings
schemes, the cover is provided by accumulation of the contribution on the individual account.
For some of the savings-based pillar 2 and pillar 3 pensions, a commitment has been made to grant a
pension benefit of a certain size. In Denmark, such schemes must be fully hedged in either a life
insurance company or a pension fund. This means that irrespective of whether a person takes out an life
insurance policy individually or in connection to employment or is a member of a pension fund, there
must be full coverage for the pension rights earned at any time. The purpose of this requirement is to
ensure that the life insurance company or the pension fund has sufficient means at all times to ensure
that private individuals or employees with an occupational pension scheme connected with their
employment do not risk losing their earned pension rights and thus all or part of their income base on
retirement. The Financial Supervisory Authority currently supervises insurance companies and pension
funds.
To carry on life insurance and pension fund business in Denmark it is required to set up an life
insurance company or pensions fund, respectively, and besides the requirement for full hedging of
pension obligations a special requirement concerning these institutions capital base is imposed. In the
event that a company or pension fund fails to meet the requirements for capital base, thus endangering
the policyholders or members interests, the Financial Supervisory Authority will demand that the
company or pension fund make a restoration plan, the purpose of which is to re-establish the necessary
capital within a short time frame. Failing this, the company or the pension fund will come under
administration, and attempts will be made to transfer the pension schemes to other companies or
pension funds having the necessary capital adequacy.
The act contains several precautions to prevent life insurance companies and pension funds from getting into situations where their capital bases are insufficient. Firstly, life insurance companies and pension funds must be licensed by the Financial Supervisory Authority to carry on business. Secondly, the
managements of these institutions are required to be qualified and honest, and a responsible actuary
with special insurance mathematical knowledge must be appointed. Special requirements are also set to
the investments made by life insurance companies and pension funds. The investment rules are to
ensure the return on and quality of the investment portfolios in the companies and pension funds, so
that the company or pension fund will almost certainly be able to meet its obligations.

5.3. The importance of the pension system to labour market flexibility


The pension system should be organised in a way that avoids obstructing labour market flexibility unnecessarily. This applies to the access to pension schemes in connection with non-standard employment
as well as with job changes.
5.3.1. Access to pension schemes
It should be noted that the requirement for access to a pillar 2 pension scheme is relatively flexible. The
typical requirement is a minimum age of 20 and 9 months of service in the line of business.

25

Also, it should be noted that the Danish pillar 2 and pillar 3 pensions are similar in many ways even
though there of course also are some differences. They are savings-based, and the size of the pension
depends on total contributions and the return on savings. This uniformity means that groups with nonstandard employment are not so dependant on coverage from pillar 2 pensions, since they can choose
to enter a pillar 3 scheme instead. It could be noted, that many of the pillar 3 pension schemes are pure
savings schemes whereas the pillar 2 pension schemes typically are insurancebased. The point is,
however, that the person can choose an insurancebased pillar 3 pension scheme if he or she wishes to
do so.
Conditions for access to pillar 2 and pillar 3 pensions schemes, respectively, may differ slightly. If the
individual wishes to choose an insurancebased pillar 3 pension scheme, it will not be calculated on the
basis of a unisex principle, contrary to the insurancebased pillar 2 schemes. Also there will not always be
a test of the persons health when joining an insurancebased pillar 2 scheme, but there will be such a test
when joining an equivalent pillar 3 scheme. There are also some differences as regards tax calculation.
For example, as regards contributions to pillar 3 pensions, the right to deduct contributions can be
divided over more years than the years in which the contributions were actually made. However, the
differences are not estimated to be so great as to impact on the choice of non-standard employment.
5.3.2. Situation in case of a job change
Most Danish labour market pensions are savings-based and the size of the subsequent pension depends
on the amount of contributions paid and the return obtained on the savings14. If employees change jobs,
they will not lose their pension rights. Employees continue to have the pension rights earned while they
worked in their present jobs.
When changing jobs, employees may choose to gather their labour market pension savings in the institute into which the contributions from the new job are paid. The so-called job-change agreement ensures that individuals have this transfer possibility; see box 5.1. Alternatively, individuals may choose to
let the pension assets remain in the institute, thus entitling them to the pension already earned in that
institute.
Box 5.1. The job-change agreement and rules in connection with relocation to another country
It is a statutory requirement that life insurance companies and pension funds have rules involving that policyholders and members in mandatory pension schemes can transfer their pension schemes, without losing their
pension rights, to another company or pension fund in connection with a job change or in connection with
transfer of ownership of a company or reorganisation of a company. On the basis of these rules, the insurance
companies have made an agreement on the transfer of pension schemes, called the job-change agreement All
insurance companies and pension funds have joined the agreement and the agreement is used in relation to
largely all schemes, i.e. also in relation to non-mandatory schemes. The agreement means that, to a far greater
extent than provided by the act, policyholders and members have the possibility of transferring their pension
schemes when they commence new employment. The agreement also implies that a transfer of a pension
scheme in connection with a job change is free of charge.

Nor are pension rights forfeited if a person gets a job abroad. However, the act lays down no rules regarding the specific situation where a policyholder or a member moves abroad. In these situations, the
Many civil servants have defined benefit pension schemes. However, this group has a certain degree of flexibility in
connection with a change of jobs. When taking up a civil servant position, individuals may on certain predetermined
conditions have their pension savings converted to a civil service pension scheme. When a person leaves his/her position as
a civil servant, the earned pension right is maintained as deferred pension. The deferred pension may on certain
predetermined conditions be converted to an amount to be transferred to the persons new labour market pension scheme.

14

26

extent to which the pension scheme can be transferred to another country depends on the terms of the
life insurance agreement or the pension scheme. Basically, however, it follows from the requirement for
the hedging of pension schemes that policyholders and members are entitled to a paid-up policy,
meaning that such persons are entitled to the pension already earned, or to a withdrawal benefit equal to
the value of the paid-up policy.
Hence, the Danish pension system seems to create no unnecessary obstacles to labour market mobility.

5.4. Transparency of the overall pension system


Getting a clear picture of their overall pension rights can be difficult for individual persons, since the
pension system is made up of benefits from several different schemes and sources. For example, almost
all people have prospects of receiving public old-age pension supplemented by pensions from the ATP
schemes. In addition, many people have entitlements from one or more of the pension schemes agreed
in connection with labour market agreements.
However, individuals receive information from the various pension institutes that can be combined to
give an overall picture. To make it easier for citizens, a website PensionsInfo - has been set up to help
give them an overview; see box 5.2.
As a part of the governments plan for simplification of rules and regulations a project on development
of a webbased system for pension calculations is started, which citizens with a right to a state civil
servants pension can access by internet. The system will enable state civil to calculate their future
pension and will be connected with Pensioninfo.
Box 5.2. PensionsInfo
PensionsInfo has been set up in cooperation between a number of pension funds, life insurance companies and
public authorities. A huge number of pension-scheme suppliers have joined the system, but not all pensions are
in the system.
PensionsInfo gives an overview of:
Public old-age pension
Whole-life insurance
Disability pension
Other coverage for example coverage in the event of critical disease
PensionsInfo also provides the possibility of calculating public old-age pension, anticipatory pension or early
retirement payment.
To gain access to PensionsInfo, a person must submit both his/her personal registration number and a personal
password. With these, a person can get personal information on his/her financial circumstances on transition to
pension income and calculations of differences in pension rights on retirement at different ages.

27

APPENDIX 1
Summary of the strategy report vis--vis the eleven objectives for
securing the sustainability of pension systems
(The parentheses indicate the sections in the strategy report in which the subject is dealt with)

Introduction and main features of the strategy

The Danish pension system is assessed as well-balanced and able to secure present and future
pensioners adequate coverage.
The pension system and overall fiscal policies cannot be assessed independently. The standard of living
and the replacement rate provided by the pension system must be seen in conjunction with the fact that
a substantial part of total public consumption is aimed at the older portion of the population. The longterm fiscal policy requirements should also be seen in light of the fact that public pensions are financed
on a pay-as-you-go basis, and that large government assets in the form of deferred income tax payments
in the savings-based pension schemes have accumulated.
If the Governments aim of reducing general government debt is achieved, fiscal policy and thus the
organisation of the pension system is assessed to be robust in relation to the ageing of the population.
To support debt repayment, etc., labour market reforms are being considered with a view of increasing
the labour force and further reduce unemployment.
In the recent years, the Danish pension system has undergone a number of changes. For example,
contribution-defined and savings-based labour market pensions have become more prevalent, the
anticipatory pension system has been reformed and older persons now have stronger financial
incentives to remain in the labour market.
Consequently, no major adjustments in the system are planned at present.
(The introduction, etc.)

Meeting the Common Objectives


1. Adequacy of pensions
1. Ensure that older people are not placed at risk of poverty and can enjoy a decent standard of
living; that they share in the economic well-being of their country and can accordingly
participate actively in public, social and cultural life.
In the Danish pension system, all older persons are ensured a public pension (public old-age pension),
which is financed on a pay-as-you-go basis. Eligibility for public old-age pension is based on time of
residence in Denmark and is independent of previous attachment to the labour market.

Public old-age pension secures all older persons a basic payment that, politically, is considered fair. The
current rules for adjusting public old-age pension and other transfer payments mean that increases in
productivity and welfare automatically benefit pensioners.
The amount of public old-age pension should be seen in conjunction with the fact that public old-age
pensioners are entitled to a number of special benefits, etc. (favourable housing benefit rules, heating
benefits, health allowances, reduced tax on owner-occupied housing). In addition, public old-age
pensioners are entitled to a number of free services, such as home help and hospital treatment. A large
proportion of public consumption in these areas is spent on the elder part of the population.
Moreover, both public and private pension provision, taken out either in relation to labour market
schemes or on a purely individual basis, supplement public old-age pension. Today, most wage earners
are covered by a labour market pension scheme.
A great majority of the political parties made a political agreement in 2000 to the effect that public oldage pension should be the sound foundation for present and future pensioners.
(Chapters 2.2-2.3, 3, 4.1.1-4.1.2)

2. Provide access for all individuals to appropriate pension arrangements, public and/or
private, which allow them to earn pension entitlements enabling them to maintain, to a
reasonable degree, their living standard after retirement.
The establishment of a number of new labour market pension schemes around 1990 and the present
expansion of these schemes mean that most wage earners can look forward to receiving supplementary
labour market pension in addition to public old-age pension and thus a higher replacement rate when
they start receiving pension. The labour market pension schemes are mandatory for wage earners
covered by a collective agreement or agreements made in the individual enterprises. Persons not
covered by labour market pension schemes may take out individual pension provision on largely
uniform terms.
Moreover, the mandatory ATP (Labour Market Supplementary Pension Fund) scheme for wage earners,
etc. was extended in 1993 and 1997 to include transfer payment recipients, and recipients of anticipatory
pension and early-retirement benefits have been given the opportunity of paying voluntary
contributions to the scheme. Almost all persons who start receiving public old-age pension will receive
supplementary pension benefits from the ATP and SP (Special Pension Savings) schemes.
(Chapters 2.0-2.1, 3, 5.3.1)

3. Promote solidarity within and between generations.


The organisation of the pension system and the fiscal policy in general aims at promoting solidarity
between generations.
The current rules for adjusting public old-age pension and other transfer payments thus ensure that a
rise in wealth is distributed between the active and the retired.

The anticipated significant rise in replacement rates (a persons total income after tax as a pensioner
compared with the persons income after tax when he/she was actively employed) is due to the grater
prevalence and expansion of savings-based schemes, which involve no significant redistribution
between generations. The replacement rate is estimated to rise from the present 74 per cent to 90 per
cent in 2045.
The replacement rate is anticipated to rise for low- and middle-income groups in particular, because
these groups have most recently set up pension schemes. Consequently, it is expected that pensioners
income will be distributed more evenly in 2045 than today. The results should be seen in light of the
fact that such long-term projections are inherently subject to many uncertainties and sensitive to the
choice of assumptions, not least including trends in real interest rates.
The debt reduction strategy is to help ensure that the anticipated growth in the number of older
persons, and thus in expenditure on pension, etc., will not lead to rising taxes for future working
generations. The strategy will thus help promote solidarity between generations in future, since a
combination of rising expenditure on older persons and rising taxes may otherwise put solidarity under
pressure.
(Chapters 2.1.3, 2.3, 3, 4.0).

2. Financial sustainability of pension systems


4. Achieve a high level of employment through, where necessary, comprehensive labour
market reforms, as provided by the European Employment Strategy and in a way consistent
with the BEPG.
The Government aims to increase employment by 87,000 persons up to 2010. The main part of the
increase is to be generated from a rise in the labour force of 67,000 persons, while a further reduction of
unemployment is to contribute the remaining 20,000 persons. The possibilities for realising the rise in
the labour force must be seen in the light of the implemented reforms of, for example, the transfer
payment, voluntary early-retirement pay and anticipatory pension schemes.
In autumn 2002, the Government will present an action plan for More people in work, which will
focus on more flexible measures aimed at finding the fastest way to employment, promoting greater
efficiency in the initiatives to find people jobs and ensuring that work pays. Special attention will be
focused on increasing labour force participation rates for immigrants.
The Governments objectives should be seen in conjunction with the fact that, by international
standards, Danish employment and activity rates are already high, and higher than the objectives set in
Lisbon.
Trends in, for example, the labour force are being followed continuously. The need for further reforms
will depend on whether the initiatives taken have the desired effect.
(Chapter 4.2.)

5. Ensure that, alongside labour market and economic policies, all relevant branches of social
protection, in particular pension systems, offer effective incentives for the participation of
older workers; that workers are not encouraged to take up early retirement and are not
penalised for staying in the labour market beyond the standard retirement age; and that
pension systems facilitate the option of gradual retirement.
In 1999 a reform of the retirement system was adopted. The purpose was to give older persons financial
incentives for remaining in the labour market and improve the options for gradual retirement. The
reform included a relaxation of the income adjustment of public old-age pension in connection with
income from work, and a fundamental change of the voluntary early-retirement pay scheme. The reform
led to a fall in the implicit tax on continued work from age 60 up to and including age 66 (amount of
pension, etc., lost in connection with a persons continuing to work compared with his/her pay) in the
order of 10-25 percentage points.
The reform of the voluntary early-retirement pay scheme included: the introduction of a special taxexempt premium for people who postpone entering voluntary early retirement; the means testing of all
forms of pension savings in the early retirement benefit, where previously only certain types of current
pension payments were set off; easier means testing for pension savings when the shift to the early
retirement benefit is postponed; and greater flexibility as regards work in the voluntary early-retirement
period.
Following a change in legislation in 2001, the anticipatory pension system was reformed with effect
from 2003. The reform includes a number of initiatives making it more attractive to employ persons
with reduced capacity for work.
(Chapter 2.1.).

6. Reform pension systems in appropriate ways taking into account the overall objective of
maintaining the sustainability of public finances. At the same time sustainability of pension
systems needs to be accompanied by sound fiscal policies, including, where necessary, a
reduction of debt. Strategies adopted to meet this objective may also include setting up
dedicated pension reserve funds.
The Danish pension system is assessed as well-balanced and able to secure present and future
pensioners adequate coverage.
The Government aims to maintain an average surplus on general government finances of 1-2 per
cent of GDP up to 2010. This secures the sustainability of the fiscal policy.
Consequently, no major adjustments in the system are planned at present.
(Chapters 2.0, 3, 4.0-4.1).

7. Ensure that pension provisions and reforms maintain a fair balance between the active and
the retired by not overburdening the former and by maintaining adequate pensions for the
latter.

Public old-age pension (and civil service pension) is financed on a pay-as-you-go basis, and the
supplementary pension schemes (labour market pension, etc.) are contribution-defined and savingsbased schemes. Savings-based schemes help reinforce the system in the face of demographic trends,
including securing a fair balance between generations. As regards the PAYG-financed pension schemes
such as public old-age pension no corresponding automatic mechanism secures a fair balance
between generations. However, the debt reduction strategy described above will help prevent the
anticipated rise in the number of older persons from increasing taxes for active people in future as a
result of growing expenditure on (PAYG-financed) pensions, etc. - thus striking a fair balance between
generations.
Moreover, it is pointed out that in the past decades the pension system has mainly been expanded by
way of savings-based schemes.
(Chapters 2.1, 3)

8. Ensure, through appropriate regulatory frameworks and through sound management, that
private and public funded pension schemes can provide pensions with the required
efficiency, affordability, portability and security.
For some of the savings-based pensions, a commitment has been made to grant a pension benefit of a
certain size. Such schemes must be fully hedged in either a life insurance company or a pension fund.
This means that irrespective of whether a person takes out an individual or collective life insurance
policy or is a member of a pension fund, there must be full cover for the pension rights earned at any
time.
To carry on life insurance and pension fund business in Denmark it is required to set up a life insurance
company or pensions fund, respectively, and besides the requirement for full hedging of pension
obligations a special requirement for these institutions capital base is imposed. Special requirements
are also made for the investments of life insurance companies and pension funds.
Life insurance companies and pension funds must be licensed by the Financial Supervisory Authority to
carry on business. The managements of these institutions are required to be qualified and honest, and a
responsible actuary with special insurance mathematical knowledge must be appointed.
(Chapter 5.2)

3. Modernisation of pension systems in response to changing needs of the


economy, society and individuals.
9. Ensure that pension systems are compatible with the requirements of flexibility and
security on the labour market; that, without prejudice to the coherence of Member States'
tax systems, labour market mobility within Member States and across borders and nonstandard employment forms do not penalise people's pension entitlements and that selfemployment is not discouraged by pension systems.

It is a statutory requirement that life insurance companies and pension funds have rules that entitle
policyholders and members in mandatory pension schemes to transfer their pension schemes, without
losing their pension rights, to another company or pension fund in connection with a job change or in
connection with transfer of ownership of a company or reorganisation of a company.
Nor are pension rights forfeited in case a person gets a job abroad. In these situations, the terms of the
life insurance policy or the pension scheme prevail. Basically, however, it follows from the requirement
for the hedging of pension schemes that policyholders and members are entitled to a paid-up policy,
meaning that such persons are entitled to the pension already earned, or to a withdrawal benefit equal to
the value of the paid-up policy.
Consequently, the pension system does not seem to put unnecessary obstacles to labour market
mobility.
(Chapter 5.3)

10. Review pension provisions with a view to ensuring the principle of equal treatment between
women and men, taking into account obligations under EU law.
The rules concerning public old-age pension do not distinguish with respect to gender. Thus, the same
amount of public old-age pension is paid to men and women; the age limit is the same, etc. The same
applies to the other statutory pension schemes. In ATP and SAP (labour market supplementary pension
scheme for recipients of anticipatory pension), which are savings-based schemes, earned pension rights
are calculated on the basis of a unisex principle. SP is a purely savings-based scheme without
redistribution.
Nor do the labour market pension schemes distinguish with respect to gender as regards annual
benefits. The schemes are contribution-defined and savings-based and the calculated pension rights are
also calculated on a unisex basis. Concerning the individual pension schemes there are no requirement
for a unisex basis.
The weight of public old-age pension in the Danish pension system helps equalise men and womens
financial circumstances as pensioners. Thus, the pension system makes allowance for womens special
circumstances (longer life expectancy, etc.).
(Chapter 2.4)

11. Make pension systems more transparent and adaptable to changing circumstances, so that
citizens can continue to have confidence in them. Develop reliable and easy-to-understand
information on the long-term perspectives of pension systems, notably with regard to the
likely evolution of benefit levels and contribution rates. Promote the broadest possible
consensus regarding pension policies and reforms. Improve the methodological basis for
efficient monitoring of pension reforms and policies.

The Government wants to give individuals the liberty to exercise greater influence on the investment
and management of their pension savings. Against this background, the Government has set up a
committee to analyse the possibilities and consequences in relation to greater freedom for individual
pension savers to invest and manage their pension savings.
Life insurance companies and lateral pension funds are under an obligation to inform policyholders and
members adequately about their rights and obligations. Similar rules are expected to be introduced for
company pension funds soon.
To facilitate comparisons between different institutes, the Danish Financial Supervisory Authority
publishes a number of financial ratios calculated on a uniform basis concerning administration costs and
return on savings. Efforts are also being made to procure a financial ratio for the distribution of the
realised result between policyholders/members and owners.
Cooperation between a number of pension funds, life insurance companies and public authorities has
led to the set-up of a website PensionsInfo which is to give individual pensioners an overall picture
of their pensions.
(Chapters 5.2, 5.4).

Appendix 2

1. The public pension system


1.1. Public old-age pension
Public old-age pension is granted upon application from the age of 65 (67 for persons born before 1
July 1939). Full public old-age pension is conditional on at least 40 years residence in Denmark. If the
time of residence is shorter, the pension will be reduced proportionately. The size of the pension
depends on the pensioners income and marital or non-marital relations, but is independent of the
recipients previous attachment to the labour market.
Denmark was one of the first countries to introduce a public old age benefit scheme. The following
features have characterised the Danish old age benefit scheme since its launch in 1892: 1) being
financed through general taxes; 2) in principle covering all citizens; 3) being an income benefit that is
phased out when supplementary income is available.
From the introduction of public old-age pension in 1957, benefits have been divided into a steadily
more earnings-unrelated basic amount topped up by earnings-related supplements. Since 1970, all public
old-age pensioners who have effectively retired from the labour market, and who consequently have no
independent income from work, have been entitled to a fixed basic amount.
In 1982 and 1993, the provisions concerning the basic amount of public old-age pension were changed,
so that the basic amount was phased out when income from work reached a certain amount.
Today, public old-age pension is made up of a basic amount and a pension supplement granted to all
persons having reached the age of 65 (67 for persons born before 1 July 1939), independently of their
previous labour market attachment. The basic amount is not reduced on the basis of earnings, except
earnings from personal work exceeding DKK 223,200 (EUR: 30,040) at the 2002-level. The pension
supplement is reduced if the pensioner or his/her spouse or cohabitant has earnings besides the pension
above a certain limit. The size of assets, if any, does not affect public old-age pension. In 2002, the basic
amount and the pension supplement total some DKK 105,400 (EUR: 14,186) for a single pensioner and
some DKK 77,200 (EUR: 10,390) for other pensioners.
Public old-age pension is adjusted annually, on the basis of the trend in wages in the private sector. The
adjustment is reduced by up to 0.3 percentage point if the wage increase exceeds 2.0 per cent. The
resultant savings on expenditure are to be used on initiatives that benefit the pensioners and other
groups of transfer payment recipients whose benefits have been correspondingly adjusted (see box 3.1
in the report).
Public old-age pension has been fixed at a level that secures all older persons a basic payment that,
politically, is considered fair. This level is the product of a long historical development. The size of
public old-age pension must be seen in conjunction with a number of other subsidies and benefits for
which public old-age pensioners may be eligible.
Public old-age pensioners are thus entitled to a number of special benefits granted according to
statutory rules. They include 1) especially favourable housing benefit rules for pensioners; 2) support to
pensioners for the payment of heating expenses; 3) a health allowance to pensioners that after

deduction of the ordinary subsidy from the public health insurance reimburses up to 85 per cent of
the pensioners own expenses for medicine, etc.; 4) especially favourable rules for public old-age
pensioners as regards tax on owner-occupied dwellings. Furthermore, particularly disadvantaged
pensioners may be granted a personal allowance following a specific, individual assessment of their
needs.
Moreover, public old-age pensioners and others are entitled, on an as-needed basis, to a number of free
services, including hospital treatment, care in special residential accommodation, home help in the form
of personal and practical help, home nursing, physical maintenance training and rehabilitation. To this
should be added a wide range of preventive and activating measures for older persons, such as cultural
activities, teaching, physical exercise, etc. These activities may, for example, take place in local day-care
centres, and pensioners can typically participate in them free of charge.
Most older persons live in ordinary housing. Only about 11 per cent live in special dwellings for the
elderly. Most recipients of public pension take care of themselves. In 2001, the proportion of older
persons receiving personal and/or practical help in the home was some 25 per cent. They received help
for 5.5 hours per week on average. Among the over-80-year-olds, some 50 per cent received personal or
practical help in the home.
Anticipatory pension system
Following a change in legislation in 2001, the anticipatory pension system was reformed with effect
from 2003. The reform includes a number of initiatives making it more attractive to employ persons
with reduced capacity for work. The reform significantly simplifies the anticipatory pension system and
will reduce the influx of new recipients of anticipatory pension (compared to what would otherwise
have been the case). The main purpose of the reform was to ensure that people who have (residual)
capacity for work are actually given a chance to prove their ability in the labour market, possibly
through a government-supported job.
1.2. Labour Market Supplementary Pension Fund (ATP)
The ATP scheme is a statutory labour market pension scheme set up in 1964. The purpose of the ATP
scheme is to provide a supplementary pension for all wage earners.
ATP is a contribution-defined and fully savings-based financed and fully funded pension scheme. All
employees in Denmark of age 16 to 64 (66 for persons born before 1 July 1939) who are employed for
more than nine hours a week pay contributions to ATP together with their employers. The wage earner
pays one third of the full contribution.
Since 1993, the scheme has also covered transfer payment recipients, including recipients of unemployment, sickness and maternity benefits. From 1997, double contributions are paid for recipients of
unemployment, sickness and maternity benefits. With effect from 1997, the scheme was expanded to
include recipients of social assistance and rehabilitation benefits, and recipients of anticipatory pension
and early retirement benefits also became able to pay voluntary contributions. Transfer payment recipients pay only one third of the contribution themselves15.

In the voluntary scheme, the member pays 50 per cent of the contribution. As part of the anticipatory pension reform, this
share is being reduced as from 1 January 2003 to one third of the full contribution for recipients of anticipatory pension.

15

ATPs Board of Directors and Council, which are composed of representatives from the social partners,
agrees the size of the contribution, which depends not on the size of income, but on working hours.
Public-sector employees with large contributions to labour market pension schemes pay lower ATP
contributions. Self-employed persons can pay voluntary contributions. The annual contribution varies
and amounts to some DKK 2,684 (EUR: 361) for a full-time employee in the private labour market.
In July 2001, the highest ATP pension was some DKK 20,300 (EUR: 2,732) a year, equal to some 20
per cent of public old-age pension, provided that contributions had been paid to the scheme since its
introduction in 1964. However, most present ATP pensioners receive a considerably smaller ATP
pension, because they have only been able to pay contributions for a shorter period. Due to womens
present high activity rates and because the scheme now covers persons with even very modest
attachment to the labour market, almost all new public old-age pensioners will receive pension from
ATP in future.
The ATP scheme was changed with effect from 1 January 2002. In future, pension rights will be
calculated on an age-dependent basis. The individual benefits will hereafter better reflect the value of
the contributions made by the individual person.
As part of the anticipatory pension reform, see above, it was decided that from January 2003 and
onwards new recipients of anticipatory pension will be mandatory covered by the ATP scheme. The
share of the contribution to be paid by present pensioners who have opted for coverage by the
voluntary scheme will also be reduced.
1.3. Special Pension Savings Scheme (SP)
Since 1 January 1999, all employees, self-employed persons and some persons receiving transfer payments have had to pay contributions to a new pension scheme, the Special Pension Savings Scheme
(SP). The SP contribution is 1 per cent of income.
Savings will be paid out over a ten-year period from the savings holders 65th year (67th if the savings
holder was born before 1 July 1939). In the event of death, the amount saved up will be paid to the
estate of the deceased person. The scheme is comparable to an annuity pension scheme as regards
payments.
Since the scheme is only a few years old, only a very small number of pensioners presently receive
payments from it.
For contributions paid for the years 1999-2000, there is no correlation between the amount contributed
and the amount added to the individual persons savings. This is because funds are redistributed, based
on the scope of employment, not income.
An amendment adopted in 2002 changed this with effect for contributions paid for 2001 onwards. In
the future, the individual persons contributions will be added in full to that persons savings in the
scheme. Consequently, redistribution no longer takes place.

1.4. Labour Market Supplementary Pension Scheme for Recipients of Anticipatory Pension
(SAP)
As part of the anticipatory pension reform, it was also decided to establish a public labour-market-like
pension scheme for anticipatory pension recipients. The scheme enters into force on 1 January 2003
and is voluntary. The contribution to the scheme is equal to 2.8 per cent of the anticipatory pension for
a single person. The anticipatory pension recipient pays one third and the government two thirds of the
contribution. In this way, recipients of anticipatory pension have the option of making supplementary
pension savings, thus becoming on a more equal footing with persons in the labour market who pay
contributions to a labour market pension scheme. The scheme is administered by ATP or another pension institute at the pensioners own option.

2. Labour market pension schemes


The existing schemes are agreed by the social partners or in individual enterprises and are fully savingsbased. Individual employees/employers currently pay contributions as a percentage of income. For the
individual person, the pension paid depends on the size of contributions and the interest on the money
paid. Labour market pension schemes are thus fully funded, and there is an actuarial correlation
between the individuals contributions and pension benefits. This design of the labour market pension
schemes means that a significant and increasing part of pension expenditure in Denmark is privately
financed.
The labour market pension schemes are built as collective insurance schemes, where membership of a
certain scheme is mandatory for individual employees. Thus, the individual employee is unable to
choose the pension fund in which the insurance scheme is to be placed, but has a right and an obligation to be a member of the collective scheme.
The fact that schemes are collective and mandatory allows individuals to secure benefits at a price that is
often independent of individual risks associated with death and disablement. Mandatory membership of
the labour market pension schemes also helps ensure high prevalence of the schemes.
The labour market pension schemes are also meant to ensure members the greatest possible return on
savings as well as low administration costs of the schemes.
In connection with the collective agreements in 1989 and 1993, a number of new labour market pension
schemes were set up. In round figures, the new schemes involved a doubling of the number of
employees covered by a labour market pension scheme. This means that almost all public employees
and most employees in the private labour market are covered by a labour market pension scheme.
In most of the new labour market pension schemes, a rise to 9 per cent in the contribution percentage
up to 2004 has been agreed.
Older labour market pension schemes typically provide for a contribution percentage of 12-16 per cent.
2.1. Civil Service Pension Scheme
This is a labour market pension scheme for public sector employees. The pension scheme for civil
servants in government service has been laid down in the Public Servants Act while for local authority
officers it is laid down in pension regulations. Consequently, it falls within the scope of the public
pension schemes.

Civil service pension schemes differ from the agreement-based labour market pension schemes by being
statutory and like public old-age pension by being tax-financed (pay-as-you-go). Thus, the commitments received by individual civil servants are not related to the building of funds. Pension is calculated
on the basis of the length of the civil servants employment period and pensionable salary on retirement.
The civil service pension has been defined in legislation.
Civil service pensions are defined benefit pension schemes. The benefits are calculated on the basis of
the previous pensionable salary and years of service upon retirement. Central government, or the county
or local authority on the basis of current revenue, i.e. tax, finances the pension. The Civil Service
Pension Scheme is the only labour market pension scheme not based on prior savings. However, most
local authorities and a few counties have hedged their commitments by taking out insurance in Municipal Pension Insurance Company Limited, KP, to which the local authorities currently pay premiums.
Payments from KP thus cover these local authorities expenditure on payments of civil service pensions.
In January 2002 some 117,000 persons were employed as civil servants. Of these more than 45.000 were
central government employees. The number of recipients of civil service pension was 75.000 of whom
about 19.000 persons have previously been central government employees.
The importance of the scheme concerning civil service pensions for state-employed will diminish, since
state-employed public persons sector employees increasingly come under contribution-financed and
contribution-defined schemes that are consistent with the more flexible and individual forms of pay
implemented in the public sector.

3. Individual pension
Individual private pension schemes can be set up on the individual persons own initiative and are
independent of occupational status. They can be set up with banks, insurance companies or pension
institutions. Generally, the same supervision rules and tax conditions apply to individual schemes and
labour market pension schemes. As in the labour market pension area, individual pension schemes can
generally be divided into schemes with current benefits to the persons entitled to pension, annuity
pension schemes, and capital pension schemes where the capital is paid as a lump sum. The size of the
pension depends on how much the individual person has saved during his/her years in employment
(including interest). The possible types of schemes on offer are the same for all life-insurance companies
whether they are dealing with pillar 1 or pillar 2 pensions. For pension funds there are limitations as to
lump sum schemes. Individual private schemes in banks can only be established capital pension
schemes where benefits are paid as a lump sum or as annuity pension schemes where benefits are paid
over a definite number of years.
In individual, private pension schemes it is up to the individual person to choose the kind of scheme
demanded, who shall be the supplier of the scheme, the size of the contribution and the kind of
benefits.
Since the late 1980s, the greater prevalence and expansion of the labour market pension schemes has
been paralleled by a considerable growth of individual pensions schemes. Even though the various
possible pension schemes on offer are identical, there is a relative preponderance of lump sump
schemes among the individual pension schemes when compared to agreement-based schemes. There
are also a comparatively high proportion of saving schemes established in banks.

Presently, about 1.1 million persons pay contributions to individual schemes. In addition, many people
will save up for their retirement via savings in their own businesses, real estates, etc.

4. Tax rules
The wide range of savings products for retirement purposes offered by life insurance companies and
banks, together with favourable tax rules, provides ample opportunities for making private savings,
adapted to the individual persons needs and desires. These favourable tax rules do not apply to other
forms of savings.
The effective taxation of pension savings depends both on the taxation of the current yield and on the
difference between the tax value of the allowance at the time when the contribution is made and the
taxation of the pensions when they are paid out. Furthermore, the phase-out of supplementary public
benefits may affect the effective taxation. Generally, the current pension taxation system creates an
incentive for making pension savings rather than no savings or other types of savings, also when allowing for the interaction with public benefits.
In connection with the payment of contributions to ATP, SP, SAP and labour market pensions, a special right exists to exclude the contribution when the taxable income is calculated (this also applies to
any employers share of the contribution). However, gross tax (a labour market contribution of 8 per
cent) is deducted from the contributions (but not, on the other hand, from pension benefits).
Contributions to individual pension schemes can, after allowance for labour market contributions, be
deducted when the taxable income is calculated. However, as regards contributions to capital pension
schemes, certain limitations apply to the size of the amount that is deductible when the taxable income
is calculated. In connection with contributions to capital pension schemes, a certain limitation also applies to the tax value of the allowance, which can amount to a maximum of 44 per cent.
Pension payments are subject to income tax. The payment under a capital pension scheme is subject to
a tax of 40 per cent of the lump sum.
As from 2001, pension capitals saved up is subject to a return-on-capital tax of 15 per cent of the yield
on bonds, etc., as well as of the return on shares.

5. Size, prevalence and replacement rates of the pensions


Public old-age pension
In January 2002, just over 693,000 persons received public old-age pension (fully or partly). The number
of persons over age 66 residing in Denmark is some 699,000 persons. The proportion receiving public
old-age pension is thus 99 per cent. In 2002, public old-age pension rates are as follows:
Annual amount, DKK, (EUR)
Public old-age pension
Basic amount
Genuinely single persons
52,524 (7,069)
Married/Cohabiting persons 52,524 (7,069)

Pension supplement
52,872 (7,116)
24,672 (3,321)

Total
105,396 (14,185)
77,196 (10,390)

Of those receiving public old-age pension in January 2002, some 99 per cent received the full basic
amount and 64 per cent received the full pension supplement. In addition, 26 per cent received reduced
pension supplements.
The replacement rate (after tax) for public old-age pension compared with the income of an average
worker was 47 per cent in 1999. Compared with the 75 per cent, respectively 125 per cent, of the wages
of an average worker, the replacement rate was 63 per cent, respectively 30 per cent.16
Public old-age pension remains the chief source of income for public old-age pensioners. For single
public old-age pensioners, public old-age pension amounted to 61 per cent of their total income in
1997. For married couples, the share is 47 per cent.

ATP
In 2001, the number of ATP recipients was 475,200 persons, equal to 68 per cent of the population
over the age of 66. In the long term, almost all pensioners residing in Denmark are expected to be able
to supplement their public old-age pension with ATP benefits.
The average ATP payment was DKK 7,314 (EUR: 984) in 2001. In July 2001, the highest ATP pension
was some DKK 20,300 (EUR: 2,732) a year. Full ATP benefits equal some 20 per cent of public old-age
pension.

SP
Payments to pensioners and estates of savings holders in the Special Pension Savings Scheme amounted
to just over 41,000 in 2001. The average payment was just under DKK 1,700 (EUR: 229) to pensioners
and just under DKK 2,900 (EUR: 390) to estates.
Labour market pensions
In 1998, the majority, or some 82 per cent, of full-time employees aged 15-59 paid contributions to a
labour market pension scheme (see the Danish Pension Market Council report 2000/2001). The proportion covered by these schemes is larger than 82 per cent, because a person who did not contribute in
1998 may have contributed in previous years or may contribute in future.
Based on the present prevalence, it is estimated that 85-90 per cent of future pensioners will receive
benefits from a labour market pension scheme, of which an estimated 70 per cent will receive more
than some 20 per cent of the public old-age pension for a single person.

Civil Service Pension Scheme


In 2001, some 122,000 persons will be entitled to civil service or other government pension upon retirement. In 2001, some 73,000 pensioners received civil service pension.
In January 2002 some 117,000 persons were employed as civil servants. Of these more than 45.000 were
central government employees. The number of recipients of civil service pension was 75.000 of whom
about 19.000 persons have previously been central government employees.
Individual pension savings plans
Presently, about 1.1 million persons pay contributions to individual schemes.
Source: Elements of social security, Hans Hansen, the Danish National Institute of Social Research, 2002. The
calculation assumes that the pensioner receives a personal allowance of DKK 2,300.
16