Danish pension funds currently face a situation where low interest rates have put under pressure the system of guaranteed interest rates for pension funds.

One solution is for pension funds to move away from interest rate guarantees towards higher quality asset management. The problem here is that investment returns will always remain uncertain.

Another solution is to put more emphasis on reducing the costs of administering pensions. Administrative costs tend to receive less attention than investment returns. Yet, unlike investment returns, they are stable and predictable.

The torchbearer for this view is PensionDanmark, the Copenhagen-based life insurer. PensionDanmark has reduced the costs of administering pensions over a 40-year lifetime to 2% of premiums, about DKK 350 (€47) per member. This is around 20% of the average administrative costs of its competitors.

PensionDanmark is a not for profit pension insurer, set up in 1990 through collective agreements involving 14 labour unions, 44 employers organisations, and 35,000 private and public companies. It provides defined contribution (DC) schemes in pension savings, insurance and healthcare to some 517,000 members. Pension contributions are between 10.5% and 16.5% of wages.

Membership of the pension scheme is mandatory and determined by the collective agreement. The fact that members do not have a choice of pension insurer places an obligation on the pension insurer to keep costs as low as possible, says Jens-Christian Stougaard, deputy director of PensionDanmark

"Mandatory schemes have an ethical obligation to deliver competitive products at low costs - important in ensuring the highest possible buying power in pensions savings. Since membership of the pension scheme is determined by collective agreement we do not need to spend money on advertising and sales work, which helps to keep costs down."

Lower costs result in higher savings: the €100 per member saved in costs each year represents an increase of €6,800 in a member's lifetime savings.

Keeping costs low also has attractions for pensions insurers, Stougaard says. "Costs are a controllable parameter with substantial inertia, unlike investments which are affected by movements of the market. Costs are also a key differentiator between commercial life insurance companies."

PensionDanmark's business concept, he says, is to provide high quality and easily understandable products. "We try to make products that are relatively easy to communicate and to administer."

The company aims to keep administrative costs low in three ways: by using a high degree of outsourcing of administrative tasks and portfolio management; by digitising all the work-flows, and by achieving economies of scale.

Outsourcing is a key part of keeping administrative costs low. PensionDanmark estimates that it has transferred three quarters of the cost of both administration and investment to outsourcing partners.

It currently has an in-house team of 70 people. This compares with staffing of between 400 and 1,000 people in comparable industries, says Stougaard.

Outsourcing also enables PensionDanmark to stick to doing what it does best. "It's not only about costs. It's also about maintaining focus. Successful outsourcing ensures that we keep a focus on our core qualifications and constantly improve.

"The aim is to identify ‘state-of-the-art' technology, achieve the necessary critical mass and make use of economies of scale," says Stougaard.

We have kept strategic areas of management in-house, principally the business development, legal and financial departments. On the product side, it has kept development in-house while outsourcing IT. In the area of investment, decisions about strategic asset allocation, risk management and manager selection are taken internally, while part of the portfolio management and back-office have been outsourced.

In the healthcare area, overall control and product development is managed internally, while the administration and operation of 70 local health care centres is outsourced.

Decisions about outsourcing are guided by a number of considerations. "We need to consider what will happen if we continue unchanged? How can we ensure that outsourcing will be successful? Do we have clear criteria for success and are they measurable?"

PensionDanmark also wants to be able to retain overall control of its operations. "Maintaining the capacity to control and evaluate is crucial."

The aim of outsourcing is to create a variant of the ‘lean' business processes engineered by the Japanese car manufacturer Toyota. "In Denmark, everyone wants to do lean. But we said why not do an agile supply chain rather than a lean supply chain?"

 

One way to achieve this agility is through digitisation. PensionDanmark has a ‘vision' of paperless processing - transactions done either by telephone to a call centre or by the use of computers to speed exchange of information. "We want to be the first ‘form-free' pension fund in the world," says Stougaard.

The aim is to cut the paper out of the system by digitising processes and plugging them in to other digitised systems. Matching data from PensionDanmark with existing data from government bodies dramatically reduces process costs.

For pensions and life insurance companies, this means making use of Denmark's national civil register. Danish residents have a personal registration certificate (CPR), which acts as a means of identification in their contacts with all public and many private institutions.

By linking its digitised processes to those of the CPR system, PensionDanmark can automatically update its data when a member changes address or dies.

For disability pensions, this means linking with the municipalities which provide automatic notification when a member of the pension scheme is awarded a disability pension. This notification is a necessary and sufficient condition for the payment of a supplementary disability pension.

Digitisation will also speed up the information flow in the area of critical illness. Later this year, PensionDanmark plans to plug into Landspatientregistret, the public register of diagnoses in Denmark, for information on new cases.

There are also plans to link in the NemKonto system. Since 2005 all citizens and companies in Denmark will be required to have a NemKonto Easy Account. The NemKonto Easy Account is part of a project to digitise the Danish public sector. All payments from public institutions will be transferred directly to this account.

The NemKonto Easy Account has a number of attractions for government, companies and individuals. The advantage for individuals is that account holders no longer need to go to the bank to cash cheques from public institutions.

The advantage for government, both local and national, is that they can save time and money by avoiding payments in cash or cheques. They will also spend less time updating account information.

The result will be that pension scheme members can avoid having to fill in almost all the forms in circulation currently, says Stougaard. The effect on reducing costs is dramatic, he points out. For example, the
process costs on a disability pension are reduced from €600 to €125.

Another way in which PensionDanmark has reduced administrative costs is through its innovative use of call-centre technology. It has replaced the traditional system of dealing with customer inquiries, whereby customers are passed from person to person until they reach the appropriate level or department, with a system which immediately selects the person at the appropriate level to deal with the inquiry.

The effect is that back office staff are moved into the front office whenever necessary. As a result most of the inquiries (80%) to the call centre are resolved with a single call.

PensionDanmark's innovative approach to speeding up communication between itself and its members could also be applied to improving links between the different elements - public and private - of Denmark's pension system. PensionDanmark has itself suggested such a course.

It remains to be seen whether the Danish government will take the hint.

See also this month's focus, page 48.