Summary of the Pension Market Council’s 1998 report

In the spring of 1997, the Danish Ministry of Economic Affairs set up a Pension Market Council.

The Pension Market Council’s task is to contribute to supporting on-going discussions of openness in the investment policies of pension institutions as well as ensure continued focus on the investment decisions made by the institutions and the development of member influence.

The tasks of the Pension Market Council

The tasks of the Pension Market Council include analysing and evaluating on a continuous basis developments within compulsory labour market pension schemes, i.e. pension schemes based on collective agreements and other agreements as well as the Danish Labour Market Supplementary Pension Fund (ATP) and the Danish Employees’ Capital Pension Fund (LD).

The Pension Market Council is responsible for preparing an annual report to the Danish Government and the public on developments within labour market pensions.

The collective and compulsory features of the labour market pension schemes, which features are to be maintained, form the basis of the work of the Pension Market Council.

The annual reports are to cover a broad range of subjects within labour market pension schemes, e.g. the development as regards:

• the prevalence of labour market pension schemes.
• member influence in compulsory schemes.
• the investments of pension institutions.
  • competitive conditions among pension institutions.
  • an analysis of the development of the key figures of pension institutions, including profit and cost development.

Based on its analyses and reports the Pension Market Council can draw attention to matters which, in the opinion of the Council, should be considered by the Danish Government.

The Pension Market Council cannot make statements aimed at the pension institutions.

The composition of the Pension Market Council

The Pension Market Council is composed of 14 members.

The Pension Market Council is to have a chairman who is independent of the two sides of industry and the pension institutions. The chairman is appointed by the Danish Government’s Appointment Committee upon the recommendation of the Danish Minister for Economic Affairs.

The other 13 members will be appointed by the Minister for Economic Affairs upon the recommendation of the two sides of industry, the pension and insurance industries, the Danish Consumer Council and the affected ministries.

The Secretariat of the Pension Market Council is placed under the Danish Financial Supervisory Authority. The secretariat function is handled by the Danish Financial Supervisory Authority in cooperation with the Danish Competition Council. If necessary, the secretariat may involve other authorities.

The Pension Market Council’s first report

The debate on the organisation of the pension system has become increasingly intense during the 1990s. This is due to the greater prevalence of labour market pensions and to the fact that pension decisions are important because living conditions will be affected by them for many years.

The Danish pension market constitutes a diverse system supplementing the public social assistance system. Traditionally the fundamental element of old age provision in Denmark has been the public old age pension. With the labour market pensions, the tax financed pensions are to a greater extent supplemented by a private insurance system where the pensions are based on past savings.

The labour market pension schemes are collective and compulsory insurance schemes designed to secure the members a suitable degree of social security in old age, in the case of disability and death. The direct influence of the individual person on the investment decisions is limited, and the insurance structure of the schemes makes it difficult for the individual person to understand the schemes, which means that they appear to be non-transparent.

The limited individual influence should be seen in the light of, among other things, the solidarity element of labour market pension schemes. The principle of solidarity involves redistribution among the members, e.g. from strong lives to weak lives, from unmarried to married people, from childless people to people with children and between the sexes. The redistribution requires that the individual saver is bound by the schemes through their collective agreements.

The insurance based pension system also involves some redistribution, for example, from those dying during the period of saving without having any survivors entitled to the pension to the remaining members of the scheme. On this point, the insurance based pension system is different from pure savings systems where the savings always accrue to the survivors in case of death.

Under the insurance pension system, a given retirement and disability pension is guaranteed. The benefit guarantee is based on, among other things, a guaranted interest rate. The interest rate guarantee may have investment consequences because it encourages investment in bonds rather than shares in situations with a fairly low interest rate level.

The report of the Pension Market Council is divided into two parts. Part I covers a number of recurring subjects, cf. the terms of reference of the Council. The subjects are as follows:

• A review of the existing labour market pension schemes.
• The prevalence and coverage of labour market pension schemes.
• Investment strategies, profit and cost development of the pension companies.
• An evaluation of the key figures.
• Competitive conditions in the market for labour market pensions.
• Developments in the fields of democracy and ownership structure.

Part II deals with: Other pension models. The intention is through draft models to illustrate some possibilities and consequences of pension systems with varying degrees of freedom for the individual person. The models contain no recommendations from the Pension Market Council.

The Pension Market Council hopes that the report will provide a platform for the continuing public debate on the organisation of labour market pensions.