While low returns and investment restrictions are the main concerns in most other European countries, it is administrative costs that are bothering the Danish pensions industry. Public authorities and politicians are demanding a more transparent system from pension funds and companies, which is putting pressure on the industry to not only show what their members are paying but to also reduce administrative costs.

The Danish minister for economic and business affairs has specifically demanded that pension funds and companies be more open about what they are charging. In addition, the Danish competition authority will include a specific chapter in its annual report, expected shortly, dealing with what it perceives as insufficient clarity in the pension industry regarding costs.

Steen Jørgensen, managing director of Finanssektorens Pensionskasse (FSP Pension) says there has been increasing demand from the authorities and the public on pension funds to become more transparent. The debate is, however, not necessarily sparked by pension funds having unreasonable administrative costs.

“Administrative costs are increasingly becoming an issue, even though you can’t say that costs in general are high. In fact, costs in Denmark are quite low compared to other European countries, but there is a very big difference within the industry. We are charging each member €50 a year in administrative fees, where others are charging their customers more than €300 a year,” says Torben Möger Pedersen, chief executive officer of PensionDanmark, who admits that it has been difficult for members to know how much they are actually paying. Having a defined contribution system has further made the issue more pressing and political, since the fees are entirely paid by the members.

The pensions fund industry has so far come to an internal agreement to make public what members are paying on an individual level. Mr Möger Pedersen is convinced that more transparency will also make the industry itself more aware of costs.

“I think it is a very positive trend, which reflects increased focus on cost reduction to the benefit of the members of the schemes,” said Mr Möger Pedersen.

Attempting to reduce costs is not a new trend, but something Danish funds have been preoccupied with for some time. Many funds have already outsourced parts of their administration. FSP Pension is one of the most recent funds considering outsourcing its administration to the service company Forca.

“We are looking to achieve large-scale advantages by outsourcing our resource-heavy pensions administration. Outsourcing would make us more competitive, so we can be a viable alternative to commercial pension companies,” said Steen Jørgensen.

Forca specialises in pension fund administration and runs the administration for PKA, PBU and Lærernes Pension.

PensionDanmark, which has already outsourced its member administration to the Danish giant ATP, is also looking for other ways to keep costs down. Mr Möger Pedersen believes that the large economies of scale in the pensions industry make the idea of outsourcing very cost effective, but he is also looking into more innovative strategies.

“We are using outsourcing as one way of reducing costs, but our cost strategy is also focused on utilising the rather advanced digital infrastructure in Denmark. We have a vision to become the first form-free pension fund in Denmark, or even in Europe, and are aiming for all our pension payments to be triggered by either a phone call from the member or based on data from public data sources regarding death, disability and critical illness,” says Mr Möger Pedersen.

In fact, Danish funds are probably leaders in the Nordic region when it comes to co-operating and have long been aware of the advantages of working together. Earlier this year, MP Pension merged with the architects’ pension fund and the veterinarians’ pension fund, which, in turn, have already had a union in place for six years. Dip, the engineers’ pension fund, is sharing a building with Joep, the lawyers’ and economists’ fund, which not only gives them administrative advantages, but also enables them to exchange information and advice between their investment departments.

OUR VIEW

A more transparent system is always a good thing and increased focus on administrative costs will not only lead to more competition within the pensions industry, but is also likely to prompt further co-operation. In fact, Danish funds have proved quite innovative in the ways they use each other and have a tradition of co-operating that other Nordic pension funds lack. Not only have many funds outsourced their administration or teamed up with other funds to gain large-scale advantages, but many have also come together in a less formal structure in order to invest ­– in particular with alternative asset classes. There are several examples of co-investments in property and forestry.

What is interesting about the Danish case is that it is not necessarily pressure from the pension fund members that seems to have sparked the debate about costs, but rather demands from authorities and politicians. However, it will be interesting to see how members will react when they notice the big difference in costs between the various funds and companies.

With the administrative costs out in the open and increasing pressure from authorities and politicians, the trend of co-operation as well as finding other ways to gain large-scale advantages look set to continue.

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