The Danish debate about pension funds’ administrative costs is becoming increasingly heated as the pension industry stands accused of not being competitive enough. The Competition Authority has demanded that the industry take action to reduce administrative costs and increase transparency. It further claims that the current high costs are an indication of a lack of competition in the market. The Danish minister for economic and business affairs has also specifically demanded that pension funds and companies are more open about how much they are charging.

However, the pension industry, backed 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 lack of competition in the market is unfounded.

“We have efficient competition in the Danish pension market. 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 of that,” says Per Bremer Rasmussen, administrative director of Forsikring & Pension.

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

“Administrative costs are increasingly becoming an issue, even though you can’t say they 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. PensionDanmark charges 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 made the issue more pressing and political, since the fees are entirely paid by the members.

So far, the 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 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,” he says.

Although disputed by the pensions industry itself, the Competition Authority has also singled out smaller pension funds as having particularly high costs.

The increased focus on costs and large-scale advantages has already had some effect. The 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 that we can also ensure low administrative costs and high returns in the future,” 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 at the start of 2010. It follows MP Pension’s fusion with the architects’ pension fund and the veterinarians’ pension fund earlier this year.

Many funds have already outsourced parts of their administration and FSP Pension is the most recent fund considering outsourcing its administration to the service company Forca.

“We want 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.

IN BRIEF

• The Danish Competition Authority has criticised the high costs, lack of transparency and low degree of competition within the pensions industry in its annual report, Konkurrenceredegørelse 2008 (The Competition Report). It identified large differences in administrative costs within the market.

• The five cheapest pension funds or companies were about 70 per cent cheaper on average than the five most expensive. That adds up to about DKr900 (€120) a year per member, but creates a difference of DKr68,000 over 40 years, according to the report.

• It also found that funds with less than 100,000 members have 60 per cent higher administrative costs than those with more than 100,000 members and that the industry should increasingly aim towards joint administration structures.

• The pensions industry has also been singled out as the least transparent industry in consumer survey Forbrugerredegørelsen.

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