Pension challenges in the future – in Denmark and United Kingdom By Nina Røhr Rimmer Associate Professor, MSc Econ University College Northern Denmark – Technology & Business

Why is the topic “pensions” interesting for a 20 yr old?

Population pyramids EnglandDenmark

 The ageing population is putting Europe's traditional state-funded pension system under great pressure.  Most European countries are reliant on 'pay-as- you-go' systems where people in work fund pension benefits for the retired via a system of social security contributions.  But in the absence of pension reform, or effective measures to boost the size of the working population, this system of pension entitlements can only be sustained through raising taxation  which will have negative incentive effects for people in work) and / or reductions in the real or relative value of state pension benefits Is there a European pension time bomb? Source:tutor2you

“UK State pension 'worst in Europe' “ The report highlights the challenge posed by an ageing population The UK's state pension system has been named as the worst in the European Union for the second year running in a survey by Aon Consulting. British pensioners receive a pension equivalent to just 17% of average earnings, the lowest level in Europe, and well below the average of 57%. Aon says the "inadequacy" of the UK's state system is "beyond question". The government says reform is already underway to make the state pension simpler, fairer and more generous. Source: BBC news, Nov. 13th

UK Pensions – from EU report: Progress and key challenges in the delivery of adequate and sustainable pensions in Europe – Nov Outlook - UK The deteriorating support ratio (= people in the workforce) and the lengthening of the time spent in receipt of pensions caused by rising longevity puts pressure on the affordability and sustainability of the pension system. These pressures are compounded by a decline in active participation in private pensions which endangers the overall adequacy of UK pension provision.

UK Pensions – cont. Challenges – UK With the last decade of reforms the UK has put itself on track towards achieving a better balance between adequacy and sustainability concerns in its pension system. The coverage and adequacy of public provision is set for significant improvements that are likely to bolster poverty protections by substantially enhancing access and entitlement accruals for women and people on low earnings and incomplete careers. However despite slightly above average growth in long-term expenditure UK state pensions should still result in one of the lowest statutory replacement rates in the EU27. The overall adequacy of UK provision will therefore continue to depend crucially on having strong and resilient private retirement income provision. The challenge UK faces with regard to ensuring the long-term sustainability of the public finances at the back of its ageing population was assessed to be at 'high' risk by the Commission/Council.

Denmark Pensions – from EU report: Progress and key challenges in the delivery of adequate and sustainable pensions in Europe Outlook – Denmark According to the 2009 Ageing Report, public expenditure on pensions will increase from 9.1% of GDP in 2007 to 10.6% in 2030, and fall back again to 9.2% in This projected growth is below EU-27 average,..... Relatively stable public pension expenditure will be accompanied by increasing importance of occupational pensions (gross occupational pension expenditure (= savings) will rise from 5.6% of GDP in 2007 to 8.9% in 2060). Between 2007 and 2060 the public pension benefit ratio, which compares average public pension benefit to the average wage, is projected to drop slightly from 39.4% to 37.8%. If occupational pensions are included in calculations, the total benefit ratio increases from 64% to 75%.

Denmark Pensions – cont. Challenges The present Danish pension system has emerged from two decades of structural reforms which as they strengthen incentives to work longer, neutralise the impact of future longevity growth and stabilise public pension expenditure while raising overall replacement rates from below to above the EU average.... The projected increase in pension expenditure over the long-term at 0.1% of GDP – despite projected improvements in overall replacement rates due to increased occupational pension - is substantially lower than the EU average. The challenge Denmark faces with regard to ensuring the long-term sustainability of the public finances at the back of its ageing population was assessed to be at 'low' risk by the commission/Council.

Pensions Pensions in Denmark - should cover your risk of dying - and your risk of surviving

Statistics: The average retirement age for people is according to Denmark Statistics is 64 years for men and 61,5 years for women 12 out of 100 young people do not live to experience retirement….. 12 out of 100 young people loose their working capacity before retirement…… Average life expectancy for men is 77 years and 81 years for women – and rapidly increasing Why do we need pension schemes? Financially secure life in retirement Insurance against loss of working capacity Insurance for the family in case of death

What should a pension scheme cover? Security in retirement State pension Labour market schemes Private pension schemes Equity in property etc. Security if dyeing Life insurance (lump sum payment) Pension for spouse and/or children (usually a time limit) Security if loosing working capacity Maintain standard of living even if income disappears or is being reduced

Saving for retirement The Danish Pension system: Tier 1 State pension ATP ( compulsory savings scheme for workforce) Tier 2 Labour market schemes Tier 3 Private pension schemes

Pension – from 65 years (automatically increasing with increases in average life expectancy) State pension £ per year plus a supplement depending on other income £ (single) OR £ (married/co-habiting) Maximum state pension is therefore: £ (single) £ (married)

ATP – compulsory work scheme All employees Ca. £ 300 p.a. paid by the employer Of which £ 100 is your own contribution Paid from 65 years Life long pension £ p.a. (max.) For further information age/language

Types of Pensions Capital pensions lump sum Annuity pensions limited period annuity payments Periodic payments pensions lifetime annuity

Suppliers of pension schemes Labour market pension schemes Company pension schemes Collective agreement pension schemes Insurance companies Traditional group scheme – Traditionally only periodic payment schemes – now possible to combine other types of schemes Unit link – i.e. ”your own account” Banks Banks cannot offer periodic payment schemes but only capital and annuity schemes as they cannot make insurance products. However they can now offer all types through partners

Tax and pension Contributions are tax deductable (certain rules apply) Amounts paid out are taxable either as personal income or with-holding tax of 40% Tax on return on investment: when placed in pension schemes = 15% for all types of investments, free capital = tax rates of between 28%-51.5%

Capital Pensions Maximum tax-deductible contributions per year 2011: £ 5,000 Account must be opened no later than 15 years after your early retirement age – i.e. 77 years old. Tax: deductible in ”personal income” However not against the top-tax contributions When paid out - a withholding tax of 40% is deducted International tendency is to allow a certain minimum amount free of withholding tax Information about pensions from Danske Bank: accounts/Pages/default.aspx

Annuity pensions When can you make an annuity pension? Account must be opened no later than 77 years old. How much can you pay? 2011 Max. £ 12,000 How is the money paid out? As a fixed amount per month for years The payments will affect your benefits from the state Tax aspects Fully tax-deductible in ”personal income” When paid out - taxed as ”personal income”

Periodic payments schemes Several types now apply Original type as a core insurance product – i.e.. Life long payments after 62 years – payments stop when you die. Now a certain guaranteed payment is available to your family - optional Possible to obtain a survival payment for your spouse and/or children - either for life or time restricted. Everyone can open an account regardless of age Is often opened after 62 years Rules for contributions and payments of income tax follows annuity pensions until now From 2010 – the only pension scheme with unlimited contribution rights

UK - However…… Following a sequence of reforms starting in 2006 the UK pension provision consists of the following three elements: 1.The flat-rate Basic State Pension (BSP), receipt of which is based on National Insurance contributions and on credits given for periods of care, unemployment and disability. Early access to the BSP is not possible, but individuals can opt to defer receipt of the BSP and receive a higher weekly pension or a lump sum. 2.The State Second Pension (S2P), an additional pension which is earnings-related (see next page) but following reform will increasingly become a flat-rate addition to the BSP. All employees (but not the self-employed) are required to either be members of S2P or to make equivalent private savings in a contracted-out private pension. 3.Private pension provisions through fully funded occupational and personal pension schemes play a large role in the overall system.

UK - However….. To address low coverage rates, the government plans to require employers to automatically enrol their employees into a company pension scheme or the newly established National Employment Savings Trust (NEST), with the possibility to opt out. Phased implementation is planned between 2012 and Further measures to increase private pension saving include legislative and taxation simplifications for occupational pension schemes. But does this help you??

Remember…… Who is paying????? There is a political problem in Europe as a whole, where the combination of the ageing population combined with increasing demand from the children/young adults and the public sector together can create a political majority for the taxpayers to just pay more and more…. In Denmark already today the population of non- contributors exceeds the taxpayers by more than 10% All European countries have a deficit of young people capable of paying taxes in the future (=YOU)

Interesting readings: Joint Report on Pensions : Progress and key challenges in the delivery of adequate and sustainable pensions in Europe – Nov Joint Report on Pensions Progress and key challenges in the delivery of adequate and sustainable pensions in Europe - Country profiles – Nov y_profiles_en.pdf omter.htm 8f f66&mepaid=55&position=3&category=inthepress Pension calculator: