Why Denmark has the ‘world’s best pensions system’

An international analysis has concluded that Denmark’s pensions system is one of the two best in the world.

Why Denmark has the 'world’s best pensions system'
Photo: Mads Claus Rasmussen/Ritzau Scanpix

The annual Melbourne Mercer Global Pension Index placed the Danish system in the highest possible category in its analysis.

The index is a collaboration between the government, industry and academia in the Australian state of Victoria.

In the analysis, three sub-indices – adequacy, sustainability and integrity – are used to measure each country’s retirement income system against more than 40 indicators, Melbourne Mercer Global Pension Index writes in a report released Monday.

These indicators include systems design, savings, tax support, contributions, governance, protection and operating costs.

The study looked at 37 different international retirement income systems.

Denmark and the Netherlands were the only two countries to receive an ‘A’ grade in the index.

That means those two countries alone have pensions systems described as a “first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”.

Nordic neighbours Norway and Sweden received B grades, and the UK and United States were both graded C+.

Denmark’s overall index value was 80.3, just lower than the Netherlands’ score, 81.0. But Denmark scored higher than the Netherlands on two of the three sub-indices, sustainability and integrity.

For sustainability, although several indicators influence the index score, the level of coverage of private pension plans, projected demographic factors and the level of pension assets as a proportion of GDP are the most important, the report notes.

The integrity sub-index considers three broad areas of the pension system, Melbourne Mercer Global Pension writes. These are regulation and governance; protection and communication for members; and operating costs.

“Denmark’s retirement income system comprises a public basic pension scheme, a means-tested supplementary pension benefit, a fully funded defined contribution scheme and mandatory occupational schemes,” the Melbourne Mercer Global Pension Index report states.

Despite its high score, there are still ways the pensions system in Denmark could achieve a higher index rating.

Raising the level of household saving and reducing household debt; introducing arrangements to protect the interests of both parties in a divorce; and increasing the labour force participation rate at older ages as life expectancies rise were all cited in this regard.

You can read the Melbourne Mercer Global Pension Index report in full here.

READ ALSO: Working in Denmark? Here's what you need to know about pensions

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Danish government unveils major new early retirement plan

A new pensions model unveiled by the Danish government on Tuesday could enable as many as 38,000 people to take early retirement by 2022, the government said.

Danish government unveils major new early retirement plan
PM Mette Frederiksen presents the new pensions plan. Photo: Henning Bagger/Ritzau Scanpix

The figure is expected increase to 49,000 by 2025, the governing Social Democratic party said at a press conference. As many as 22,000 of the 38,000 are expected to take the opportunity to retire early.

The pensions reform is aimed at people in physically-demanding jobs who are approaching retirement age, and has been a central part of Social Democrat policy since the 2019 general election campaign.

“You should be able to stop working before you are worn down,” Prime Minister Mette Frederiksen said.

“Pension life should be good. It should mean some good years with time to pursue your interests and be with your family. It should be a right,” she said.

The government proposal for the right to early pension applies to persons who have been on the labour market for at least 42 years by the time they reach the age of 61.

Included in the proposal is a ‘staircase’ model which allows pension to be taken 1 year early after 42 years of working, 2 years early after 43 years, and 3 years early after 44 years.

The pension will be 13,550 kroner monthly before tax, with the option of earning 24,000 kroner tax-free annually.

The pension, which can be supplemented with payouts from private pensions, is reduced for individuals with private pensions of over 2 million kroner.

Three billion kroner annually will be budgeted for the pension, according to the proposal.

Denmark’s current retirement age is 66 years, but it is scheduled to be gradually increased in the coming years.

READ ALSO: Working in Denmark? Here's what you need to know about pensions