Denmark retains crown with pensions

Denmark provides better pension provision than elsewhere in Europe, and it is also common for employers to offer company cars, flexible benefits schemes and long service awards, explains Peta Hodge

If something is rotten in the state of Denmark, it doesn’t appear to be its employee benefits, in particular pensions provision. The country has come top of the European league table for pensions, according to Aon Consulting’s 2007 European pension barometer report, for the second year running.

That said, Denmark’s state pension taken in isolation ranks just 15th out of 25 European countries. This is made up of two elements: a national pension scheme funded through taxation, which provides flat-rate benefits, and a compulsory money purchase scheme, which is funded through employee and employer contributions.

When it comes to the adequacy of private pensions, however, Denmark ranks second in Europe. Although impressive, this is just three places ahead of the UK. Virtually all Danish pension schemes are run on a defined contribution (DC) basis, often with a level of employee engagement that eludes many UK schemes. Luc De WÈe, senior international consultant in Watson Wyatt’s Brussels office, says: “[The schemes] are generally what one would call cafeteria plans, where an employee can decide where to put the focus of contributions [in terms of dividing them between] retirement, death and disability benefits.”

Schemes have to be fully funded, which is usually done through insurance. Pension funds also exist, however, either in the form of individual company pension funds, which are on the decline, or the increasingly popular, and more flexible, multi-employer pension funds, which are set up for people in the same profession or within the same sector or industry.

Contribution levels vary, but are on the whole are slightly higher than in the UK. Watson Wyatt’s Benefits report 2007 shows contribution levels to individual occupational schemes are typically 9% for blue-collar workers, and12%-15% for white-collar workers, while the contribution rate to a multi-employer scheme is usually about 9%. In both cases, the split tends to be around one-third employee contribution against two-thirds employer.

Aon’s aforementioned research shows that an average earner in Denmark can expect to receive a pension worth 75% of salary, compared with 58.7% for Europe as a whole.

But although the Danish pension system is looking healthy at the moment, it is not without its challenges. In particular, the pensionable age is due to rise from 65 to 67 years by 2027 and any further increases in retirement and pension ages in response to demographic changes are expected to encounter fierce opposition from unions.

As well as DC pension schemes, an increasing number of Danish employers are responding to long waiting lists in the national health service by providing staff with private medical care. According to Watson Wyatt, about one-third of large companies now cover their staff for services such as surgery and hospitalisation as well as outpatient treatment. A smaller number help with dental and eye care.

Company cars also feature on the benefits menu of most Danish employers. According to Mercer’s Statutory benefits & typical benefits practice: Western Europe – Denmark, 2007/2008 Edition, 97% of managing directors, 66% of middle managers, 24% of other white-collar employees and 71% of sales staff receive company cars. Cash alternatives to company cars are also available from about one-third of companies.

Other common benefits include meal allowances or subsidised staff canteens, provided by 84% of employers; long-service awards, offered by 88% of companies; and mobile phones. In addition, performance-related bonuses are widely used, particularly for senior staff, while employee share schemes are also offered, but by much fewer employers.

Flexible benefits schemes, which are tax deductible, are common and typically include internet connections, mobile phones, computers, newspapers, cars and subsidised travel. But all is not plain sailing. Hanne Jermiin Johansen, international benefit consultant at Mercer in Denmark, says: “Many companies have wanted to provide flexible benefits but have been challenged with the administrative workload. Another challenge is the interpretation of the tax rules applying to the benefit.”

If you read nothing else, read this…

• The typical Danish employee’s pension comprises three elements: a flat-rate state pension funded through taxes; a second-tier state pension to which both employees and employers contribute; and an occupational pension.

• Almost all Danish occupational pension schemes are defined contribution and most are funded through insurance.

• Other popular benefits include: private medical insurance, company cars, staff canteens and meal allowances, performance-related bonuses and long-service awards.

• Flexible benefits schemes are common in Denmark and are tax deductible.