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Compared to abroad: the Danish state loses billions on weak competition in the pension sector

Carsten Vitoft

tirsdag 08. juni 2021 kl. 14:00

Two of the country’s most prominent pension professors now stress the urgent need to address competition in the Danish pension sector. They both point out that it is actually the Danish state that stands to gain most financially – probably several billion Euro – if the government follows the recommendations put forward by the Competition Council just over a year ago.

“If we succeed in increasing competition so that Danes benefit from the advantages of scale that ought to exist in the pension sector, it is not just the individual Dane who benefits, but the whole community of Denmark. There are about 400 billion Euros in pension companies, and about half of that is deferred taxes that will eventually go to the state. So it is clear that the community and the state have a clear interest in these pension funds being managed efficiently,” says Christian Schultz, chairman of the Competition Council and professor at the University of Copenhagen.



So far, the government has completely ignored his analysis, published just over a year ago. It pointed out that there are no advantages of scale for customers of Danish pension companies – unlike in other countries. This makes saving for a pension in Denmark far too expensive, and the state’s revenue base in particular is crumbling in the pension sector.

“I am very unenthusiastic about a model where customers have to move around between companies to ensure competition. Consumers themselves cannot make rational decisions about switching companies. We can see in the Competition Council’s report that it doesn’t work. Consumers are the innocent victims of bad advice and misleading information. And it gets worse because the official cost figures do not include hidden costs in the markets. Alternatives and active management are particularly bad. If it is as bad in the pension sector as in the banking sector, we are talking about billions of Euros in extra costs every year. I think mandatory index funds should be considered for a large part of the assets. And a professionally run fund for alternative investments that companies can buy into – ideally in ATP,” says Professor Carsten Tanggaard from Aarhus University.

It is working much better in Australia and the Netherlands. When pension companies get more funds, costs for customers fall. One percent more in assets only increases costs by 0.7 percent. This is what the Competition Council has uncovered in its report.

In Denmark, the ratio is almost the reverse, the Competition Council dryly notes in the third follow-up to the report a few weeks ago.



“For commercial companies in isolated terms, a 1% increase in profit is accompanied by a cost increase of almost 1.2% (and thus significantly more than 1%). This reflects the disadvantages of scale mentioned above, which are linked to the fact that some of the commercial companies have outsourced the investment task to a company belonging to the same corporate group as the pension company. If it is assumed that the advantages of scale that were realised in the Netherlands according to the analyses mentioned above were also realised in Denmark in line with the increase in pension assets, it would cost the Danish companies almost 160 million Euro less to invest the pension assets of Danes in 2017,” the Competition Council writes.

It could be put simply that when pension companies swallow half a percentage point to a full percentage point too much in annual costs every year, not only 160 million Euros disappear from Danes’ pension schemes. There will also be 160 million Euros less to annuitise in all the years to come.

“Our analysis does not say anything about the exact figures. But this is a sector where the fortunes are so large that even small improvements become very large savings, both for the individual and the state. We all have an interest in ensuring that these funds are managed as well as possible. But we can say quite firmly that this is not the case now and that there are not the advantages of scale in the pensions industry that there should be and are in other industries,” Christian Schultz concludes.

Carsten Vitoft

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