Basic concepts

The basic and supplementary pension
Since the 'Choice of pension' in 2006, the total pension has been composed of a basic pension and a supplementary pension. The total pension is determined regularly according to realistic expectations about the future.

The basic pension 
The basic pension is funded. This means that the pension provisions include an amount corresponding to the current value of the pension commitments. The basic pension is calculated according to the technical basis including the basic interest rate and a number of assumptions about e.g. mortality and disability.

On Regulations 3 and 4, the basic pension is calculated according to a conditional basis including a basic interest rate of 0.5 %. The conditional basis implies that the basic pension may be reduced if the assumptions are changed permanently, or if current legislation is changed, cf. Regulations 3 article 27.2 and Regulations 4 article 16.2. The size of the basic pension appears from all pension calculations.

On Regulations 1 and 2, the basic interest rate is the interest rate used for calculation of the members’ annual pensions. Until 1997, the basic interest rate was 4.5 %. In 1997, it was reduced to 2.5 % due to legislation. In 2000, it was reduced to 1.5 % and on 1 April 2011, it was reduced to 0 % for contribution increases, single contributions and payment of bonus. Consequently, DIP has members with several different basic interest rates.

Just as the basic interest rate is different on each set of regulations so is the biometric assumptions. 

The total pension
On Regulation 3 and 4, DIP calculates a basic pension which is conservatively determined as well as a pension based on more realistic assumptions. The realistic assumptions result in a higher pension, and it is this total pension that appears from the pension statement as a benefit. The board can change the assumptions.

The total pension is calculated on basis of an interest rate which is typically higher than the interest rate of the basic pension. Consequently, the pension commitment already includes a high future expected interest payment. Accordingly, the return on investments must be high to ensure additional bonus payments - and increasing pensions.

The supplementary pension 
The supplementary pension is the difference between the total pension and the basic pension. Contrary to the basic pension, the supplementary pension is unfunded. Accordingly, DIP does not make provisions for covering the supplementary pension. The supplementary pension is paid successively from the pension fund’s undistributed reserves which consist of the pension fund’s equity and collective bonus potential.

The supplementary pension may be adjusted or possibly suspended if e.g. the return does not match the assumptions.

The projected pension
The pension statement includes a projected pension stating the current value of the pension at age 65 based on a number of assumptions. These assumptions may change, and consequently the projection is not binding. Some of the assumptions are social and applicable for the entire pensions industry while others are determined by DIP.

In the projected pension future contributions are adjusted for inflation, and the pension is then discounted with the inflation rate.

Generel assumptions of the pension market 2017 2018-2020 2021 

Inflation

1 % 1 % 2 %

Labour market contribution

8 %

Pension return tax

15.3

Also, interest rates and costs are used for administration.

Assumptions of deposit interest rates (pre-tax) 2017 2018-20 2021  

Regulations 3 and 4

6.14 % 3.90 %

4.96 %

Regulations 1 and 2 (Interest group 2, 3 and 4)

0.00 % 0.00 % 0.00 %

Regulations 1 and 2 (Interest group 1)

1.77 % 0.77 % 1.77 %

Annuity certain and endowment policy on Regulations 3

3.90 % 3.90 % 5.80 %

Annuity certain and endowment policy on Regulations 4:

 

Aktiemax

DIP Vælger

Obligationsmax

4.70 %

3.90 %

2.60 %

4.70 %

3.90 %

2.60 %

6.70 %

5.80 %

4.60 %

Assumptions of administrative costs

Pension scheme with current payments
The administrative costs account for 0.8 % of the monthly pension contribution and single contribution.

Annuity certain and endowment policy
The administrative costs account for 0.8 % of the monthly pension contribution and single contribution.

Fee on pension payments
The monthly fee on pension payments is DKK 30.

Fixed costs

Monthly costs for all members

DKK 30

The investment costs account for 0.7 % of the deposit value at the end of the year and is deducted from the year's return before tax. The investment costs for the annuity certain,endowment policy and retirement insurance on Regulations 4 account for:


Aktiemax

DIP vælger

Obligationsmax

0.7 %
0.7 %
0.3 %

The costs are deducted from the calculated return.


DIP calculates individual risk-adjusted premiums on death and disability depending on the member’s age, admission date and paid pension contributions.

Besides above-mentioned assumptions, there is a group insurance premium for members covered by the group insurance.

Interest rates, costs and risk-adjusted premiums determined by DIP are the pension fund’s bonus rates this year. They are determined annually by the board and notified to the FSA.

Deposit interest rate
The deposit interest rate is the annual payment of interest to the deposit. The deposit interest rate is determined annually on basis of the pension fund’s financial situation. Members subject to the same Regulations are always paid the same interest rate while there may be different interest payments on the different Regulations. The different deposit interest rates reflect the different degrees of risk related to the pension commitments of the different schemes.

Bonus 
Bonus is distribution of a possible surplus generated through a better actual development than assumed on calculation of the basic pensions. Surplus can occur within three areas – payment of interest, administration and insurance cover.

Interest rate bonus can be paid if the investment return exceeds the basic interest rate.

Administration bonus can be paid if the pension fund can manage the pension schemes at a lower price than assumed.

Risk bonus can be paid if the costs related to insurance cover on death and disability have been lower the assumed. The pension scheme is added bonus if the total of the three above-mentioned bonuses is positive.

There are clear rules for distribution of the surplus. The individual member is paid a share of the surplus relative to the contribution he/she has made to the surplus. The rules applying to distribution of surplus are specified in the FSA’s Declaration of Contributions. Here it is established that all members must be treated fairly, and no special groups (i.e. age groups) should benefit from preferential treatment.

The part of the surplus not distributed as bonus is transferred to the collective bonus potential. The collective bonus potential and the equity are the pension fund’s undistributed reserves ensuring that DIP is able to pay the calculated pensions.

In DIP it is only the life annuity that is eligible for bonus payment and consequently subject to the contribution principle. Annuities certain and endowment policies are not eligible for bonus as interest is paid at the rate of the actual return, the costs equal the actual costs and there is no insurance cover. The life annuity is a so-called average rate product while the annuity certain and endowment policy are market rate products. DIP’s board has decided the objective of the bonus policy which is guidance to distribution of the surplus in DIP.

Understanding your pension