PensionReforms' summary and comments
PensionReforms has already looked at a report that summarised the intricacies of the Danish pension arrangements here.

This report looks at just one aspect of the Danish pension system - the ATP - Arbejdmarkedets TillaegsPension or Labor Market Supplementary Pension.

Here is how the ATP fits into the framework:
At Tier 1 the "Universal pension" is payable from age 65 to citizens residing in Denmark (with at least three years' residence between ages 15-65) and non-citizens meeting the minimum residency requirements (10 years with at least five years before the pension age).  The cost is paid from general tax revenues and the full pension accrues evenly over 40 years' residence.  There is also an income-tested supplement.

There are two parts to Tier 2.  Both are centrally administered but are fully pre-funded:
(a) Labour-market supplementary pension (ATP) started in 1964 for employees aged 16 to 65, including recipients of state benefits.  Non-employees can also participate.  The employee and employer both contribute in a 1:3 ratio but they are low - less that 1% of average earnings with a patchy past record of adjustment.  The Defined Benefit pension is payable in full only with a complete contribution record.  The maximum annual pension for new pensioners with a full contribution record is equivalent to 40 percent of the basic social pension and less than 8 percent of the average wage.  The actual pension depends on when contributions were paid in relation to age, after adjustment for the cost of a death benefit cover.

(b) "Special pension savings scheme" (SP): for employees aged 16 to 65, including those on parental leave, recipients of cash sickness or unemployment benefits, and the self-employed.  The members contribute 1% of gross pay and the accumulated amount is paid over ten years by instalments.  However, contributions have been suspended since 2004.  Balances can be invested through the ATP.

Then there are the near-universal Defined Contribution "labour market" schemes at Tier 3 (occupational schemes) that typically deliver annuities at retirement.

"The investment policies and performance of ATP have attracted considerable international interest in recent years. It has been named as the 'best pension fund' in Europe on several occasions ... and its new approach to risk management was specifically mentioned in the concluding chapter of Peter Bernstein's latest book on Capital Ideas Evolving.... The purpose of this note is to offer a brief evaluation of the investment and operating performance of ATP and discuss the relevance and sustainability of its risk-sharing arrangements."

The report suggests that the ATP has had an "enviable record of high operating efficiency and investment returns."  But the returns have been "...uneven over the years, reflecting the applied investment policies and rules as well as prevailing financial conditions."  Nevertheless, the real return has averaged 5.69% p.a. over the period 1964-2005.

The reported "internal administrative & investment expenses" over the six years to 2006 averaged seven basis points (0.07% p.a.) or DKK55 per account in 2006.

"However, ATP also suffers from several weaknesses and shortcomings. It has a cumbersome governance structure [described in detail], rooted in labor market relations and the role of social partners, while its group annuities have been based on rather 'idiosyncratic' risk-sharing arrangements. Nevertheless, it took the lead in using long-dated interest-rate swaps in euro markets and recently created a department that specializes in hedging its pension liabilities. And it is in the process of adopting a new plan for guaranteed benefits that aims to enhance the management of both investment and longevity risks."

As the report notes, it seems "ironic" that such "a highly efficient institution is used for providing a meager improvement in pensions."

PensionReforms agrees.  It doesn't really matter how efficiently the ATP is run, it should not really be a part of the state's pension arrangements.  It is complex, cumbersome (the report's words) and delivers so little but with so much care.  Given its virtual universality, the ATP's members would be better served if the Tier 1 pension were increased by the ATP's expected benefits and the ATP folded into the government's own accounts. 

Denmark has relatively significant problems with poverty amongst the old.  According to the EU, 18% of the Danish over 65s are "at risk of poverty (see here or, according to the OECD, 10% - see here.  PensionReforms thinks the ATP is an unnecessary distraction especially in the light of the small contribution it makes to retirement incomes.  (File size 115 KB;  23 pp) 335