In Denmark, they stack pensions on top of pensions

Published on: 10 December 2021

The second-best pension system in the world. That's what we have in the Netherlands, according to the annually published Mercer CFA Institute Global Pension Index, which includes 43 countries. Are they faring so badly in other countries? Every two weeks, for twenty weeks, we are delving into the system of a specific country. Episode three: Denmark.


After two countries that have it a lot worse (Germany and Italy), it is time for a country that, like the Netherlands and Iceland, has an 'A grade' (see box) pension system. There are therefore quite a few similarities between our pension system and that of the Danes. They also have a kind of government pension (OAS). And in Denmark, this "first pillar pension" is also financed on a pay-as-you-go basis (employees all pay for the old age of the pensioners). Denmark differs from the Netherlands in the way the amount of the state pension is determined.  In the Netherlands it is a fixed amount (the AOW), but in Denmark the pensioner receives a basic pension plus an income-related supplement. So, the more you earn, the less state pension you get.  


Mixed model

And in this first pillar, there is another difference between Denmark and the Netherlands. Because here we do not have a pension scheme that all employees participate in on a mandatory basis, as is the case with the Danish ATP. ATP is a national scheme to which employees contribute a fixed amount each year (over 450 euros per year) and which is invested in a low-risk way. From the moment of retirement, the retiree receives a periodic benefit. The Danes call it a first-pillar pension, but it is actually a kind of hybrid because it is funded on the basis of capital coverage (where the employee builds up his own pension through a pension fund).


In Denmark, there is also a second pillar (which is mandatory for most employees) with a supplementary pension based on capital funding. Just as in Denmark, this pension is set up collectively by employers and employees. The administration is often placed with an insurer. The only difference is that the premium is deposited in a personal pension account instead of a big pot. Danes can choose between various investment risks. At the time of retirement, the money in the pot is converted into periodic payments. A portion can also be taken as lump sums (such a lump sum scheme is also in the works in the Netherlands). Ninety percent of all employees are members of such a fund.


Physically demanding professions

The retirement age there will rise gradually to 74 in the coming years (expected in 2070). Self-employed and employees without a collective agreement are, as in the Netherlands, not obliged to save for retirement (with the exception of ATP). The government is working on a plan to allow Danes with heavy occupations to retire as early as age 61 starting in 2023. The replacement ratio (the ratio of pension benefits to final salary) is just slightly higher in Denmark at 74 percent than in the Netherlands (71 percent). Danes typically contribute 15 percent of their salary to pension contributions (in the second pillar).


Gender gap

What is striking is that the "gender pension gap" - women on average receive a lower pension than men - is a lot smaller in Denmark than in the Netherlands (4.9 percent versus 14.1 percent, based on 2018 figures). An important reason for this is the exceptionally high proportion of part-time work in the Netherlands (37 percent) in women's total employment. In Denmark, it is 19 percent. 

In the third pillar, the Danes work extensively with insurers (the company then outsources the pension scheme to them). This is more common than in the Netherlands, where third-pillar participants often receive supplementary pensions via the fund from which they also receive their second-pillar pensions.  

The Danish pension system:    Facts & figures


Rating in the Mercer CFA Institute Global Pension Index 2021: A-Grade ("A first-rate and robust system that results in a good pension, is future-proof and demonstrates a high degree of integrity.")

three-pillar system

partly capital funded, partly pay-as-you-go funded

Adequacy (Mercer ranking):

Sustainability (Mercer ranking):

Integrity (Mercer ranking):