The return on holiday allowance funds comes from two sources: firstly, interest income on holiday allowance funds held by employers, and secondly, a return on investment from funds paid into the Holiday Allowance Fund. Only holiday allowance funds paid in by employers can be actively invested, with the return following developments in the financial markets.
Employers may retain holiday allowance funds as liquidity within their organisations in return for paying interest equivalent to the general annual wage increase. This is also known as the indexation of holiday allowance funds held by employers. The Minister for Employment sets the indexation rate on the basis of the Danish Employers’ Association’s wage statistics. Indexation contributes positively to the return on holiday allowance funds, and over the course of the year, indexation corresponded to a return of 1.9 per cent on the funds held by employers.
At the start of the year, index-linking had a significant impact on members’ returns, as the vast majority of funds were held by employers. As employers began to pay in holiday allowance funds, LD Pensions was also able to start generating a return on investment.
Return on investment in 2021
To offset losses, before the second round of early holiday payouts was opened at the end of March 2021, part of the holiday allowance funds received was held in cash. Following the conclusion of the early payouts, it became possible in late summer to increase investments as a result of payments from employers.
Equity investments generated a strong return of 28.5% in 2021. Credit investments and high-grade bonds yielded returns of 3.4% and -2.4% respectively. Currency hedging had a negative impact on the return, primarily due to movements in the US dollar.
The total return – after pension return tax and costs – was 3.7% in 2021. This includes returns from indexation, as mentioned above. The return of 4.6 per cent credited to members in 2021 also included a return contribution from 2020.
Developments in early 2022
By the start of 2022, employers had paid in approximately 60 per cent of the holiday allowance funds, meaning that most of the funds can now be actively invested by LD Pensions. The return on members’ holiday allowance funds will therefore, in 2022, follow developments in the financial markets to a far greater extent than was the case in 2021. However, around 40% remains with employers, and these funds will continue to make a positive contribution to the Return.
The return on investment was negative in January 2022. This is why the total return has fallen to 2.3%.
The start of 2022 has been characterised by negative returns, particularly in the equity markets, but credit and bond investments have also been affected. Uncertainty over rising interest rates and inflationary pressures has caused turmoil in the financial markets. Statements from central banks in the US and Europe regarding possible tightening of monetary and fiscal policies have a significant impact on both the equity and bond markets. Rising interest rates can lead to capital losses on bond investments and affect share prices in companies where costs rise as a result of higher interest rates.
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