Pension fund administrative costs have been an issue in Denmark for some time, but the debate has become increasingly heated as the industry has been accused of not being competitive enough. Konkurrencestyrelsen, the Danish Competition Authority, has demanded that the industry take action to reduce administrative costs and increase transparency. Furthermore, it claims that the current high costs are an indication of lack of competition in the market. The Danish minister for economic and business affairs has also specifically demanded that pension funds and companies reveal how much they are charging.

However, the pensions industry, backed up by its trade association Forsikring & Pension, is not only annoyed by the findings, but actually claims they are wrong. The association says that the allegation of a lack of competition in the market is unfounded.

“We have efficient competition in Denmark. If there was little competition, we would have a market dominated by a few large players with high profits, high salaries and few products on offer. But the reality is the opposite,” says Per Bremer Rasmussen, managing director of Forsikring & Pension.

While there has been increasing demand from the authorities and the public on pension funds to become more transparent, the debate did not gather steam simply because administrative costs were unreasonably high.

“Costs are increasingly becoming an issue, even though you can’t say that they are generally 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.

So far, the pension industry has 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 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,” he says.

Although disputed by the pension industry itself, the Competition Authority has also singled out smaller industry-wide funds as having particularly high costs. This conclusion seems particularly surprising, since most of the industry-wide funds are charging their members around DKr600, while the highest fees can be found at pension companies such as Skandia and Danica Pension.

However, the increased focus on costs and large-scale advantages has already had some effect. Two small funds, PNN Pension and PHI Pension, are now considering merging with the much larger player Industriens Pension, the pension fund for industrial employees.

“New legislation and the growing complexity of pensions, makes us want to become part of a larger structure so we can ensure low administrative costs and high returns,” says Ole Wehlast, chairman of both pension funds’ boards.

PNN Pension and PHI pension, which have outsourced their administration to AP Pension since 1992, are aiming for the merger to take place in the beginning of 2010. It follows MP Pension’s fusion with the architects’ pension fund and the veterinarians’ pension fund earlier this year.

Joint administration structures are, however, no recent phenomenon and many funds have already outsourced parts of their administration. FSP Pension is the most recent fund considering outsourcing its administration to the service company Forca.

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

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

Others are going even further in the pursuit of keeping down costs. PensionDanmark, which has already outsourced its member administration to Danish giant ATP, is looking into more innovative methods. Although Mr Möger Pedersen believes that the large economies of scale in the industry make the idea of outsourcing very cost-effective, he also has a more far-reaching vision.

“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 on death, disability and critical illness,” says Mr Möger Pedersen.

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