Denmark offers pension model

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• Most workplace pensions are defined contribution schemes, which are funded through insurance.

• Other popular benefits include: private medical insurance, company cars, staff canteens, free newspapers and cut-price computers and mobile phones.

• Flexible benefits schemes are becoming increasingly common, offered by more than a third of employers

Denmark’s low-cost state top-up pension scheme could be a model for the UK, says Sally Hamilton

Sweet pastries and bacon are long-standing Danish imports to the UK, but workplace pensions could soon join them. ATP, the firm behind Denmark’s compulsory state top-up pension scheme for workers, is hoping to bring its formula of high-volume, low-cost, no-frills pensions to the UK by the end of this year to show employers a viable alternative to the national employment savings trust (Nest) scheme, due to be launched here in 2012.

ATP is a key plank in Denmark’s national pension strategy, covering almost all workers and providing a compulsory top-up to the basic state pension since 1964. The basic state pension is currently worth a maximum of £8,000 a year and is funded from taxes (currently 51.5% for higher-rate payers). Staff must make a one-third contribution and the employer two-thirds to the ATP scheme, which works out at less than 1% of salary for the employee. The scheme currently pays a pension income of about £3,000 a year.

Morten Nilsson, ATP’s head of international operations, says the fund costs less than 0.1% a year to run, including £5-£7 per member for administration and a management charge of 0.04% a year. With external costs, this adds up to 0.25%, compared with typical UK pension charges of 1%-1.5%.

Efficient record-keeping, the use of digital technology and not duplicating communications, helps control costs, says Nilsson. “When members retire, they are now paid their pension automatically. Before, we wrote to ask them if they wanted it at retirement or to defer it, which was a waste because 95% opt to take it at retirement.”

Employees also pay into workplace pension schemes, most of which are compulsory, and many aim to retire on up to three-quarters of their earnings. The schemes are collective labour market (union-related), industry-wide or cover a group of companies. Almost all are defined contribution. Staff typically pay one-third of the total contribution and the employer two-thirds, up to 12%-18% of their salary, all of which is tax-deductible.

Compulsory contributions

Kim Sorensen, sales director at the Danish division of consultancy Mercer, says contributions to labour market schemes have been compulsory since 1993. “Many people up to their mid-50s will probably retire on good pensions as they are putting in at least 12% of salary, but many in their mid-50s and 60s have only the state and ATP pensions, which are not enough for a comfortable retirement.”

Life, critical illness and disability insurance have been offered alongside workplace pensions for some time, but other benefits are “starting to explode”, says Sorensen. “Once it was all about the company car. It still is popular, but for some it is now more expensive than buying their own. Flexible benefits are starting to take off with well over a third of employers offering this. Three-quarters of them outsource the administration, though.”

Under flex, employees are taking advantage of a scheme to buy their own computers with tax deducted at their marginal rate so, essentially, at half price.

Private medical insurance is also popular, covering up to 80% of employees because of long national health waiting lists. Sorensen says: “Medical insurance must be offered to everyone in the company, not just white-collar workers, for the benefit to be tax-free.’

Tax-efficient share schemes are also increasing, nowadays extending to whole workforces rather than just managers. Childcare is not offered as a benefit because state help is quite generous, but some organisations offer facilities to bring children to work during school holidays. Subsidised canteens are also becoming the norm.

Danish pension provision typically comprises a flat-rate state pension, a top-up state pension and a workplace pension scheme.

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