Before the new Holiday Act comes into force on 1 September 2020, there will be a transitional year during which the holiday allowance accrued by employees must be reported to a new fund, The Holiday Allowance Fund. It is then up to employers to decide whether they wish to retain the funds within the company in return for paying an annual indexation in line with wage growth, or whether they wish to pay all employees’ accrued holiday allowance funds into the fund in one go. They may also opt for a combination whereby they make contributions for some employees but not for others.
Each employer makes their own decision, and if the employer chooses not to pay the full amount in one go, they may opt for full or partial payments on an ongoing basis until all of the employees' holiday allowance funds have been paid. The employees' Holiday Allowance Fund thus acts as a safeguard for companies’ liquidity, ensuring that a company avoids having to pay double holiday pay to its staff during the transition year. However, the number of employers who choose to pay into the fund as quickly as possible could have a significant impact on investment activities.
“The fact that we do not know in advance what employers will do poses challenges for LD Pensions' strategy,” says Charlotte Mark, Chief Financial Officer in LD Pensions. “That doesn’t mean we’re unhappy that funds are held by employers. Not at all. The funds held by employers provide a secure return, and that in itself is a good thing. But there must also be scope for more high-risk investments in order to generate a good Return for employees, and this requires that a portion of the funds be paid in by employers before they become due upon the employee’s retirement.”
Higher returns if employers contribute to the fund
As part of the preparatory work on the legislation, the Ministry of Employment has carried out a calculation showing that the holiday allowance funds invested with The Holiday Allowance Fund will yield an average return of 4.5 per cent per annum, whilst holiday allowance funds retained by employers will yield an average return equivalent to wage growth of 3 per cent per annum. This means, in simple terms, that the more of the holiday allowance funds the new fund can invest, the higher the average return for employees will be – and thus the amount they can receive upon reaching state pension age.
Charlotte Mark points out that the calculation is based on a few simple assumptions. “We will look at various investment tools should a situation arise where only a small proportion of the funds can be actively invested. We are confident of a good result, even if it turns out that many employers need the liquidity,” says Charlotte Mark.
The return on an individual employee’s holiday allowance funds will not depend on whether their employer chooses to make contributions. The fund’s returns comprise both the interest on the funds held by employers and the returns on investments, and these returns are distributed to all employees. It is therefore all employees who benefit when employers make contributions to the fund.
Safeguarding the funds of both employees and employers
The reason why employees’ accrued holiday allowance must be paid into the Holiday Allowance Fund is a political decision designed to accommodate both employers and employees during the transition to the new Holiday Pay Act. It will secure employees’ holiday allowance whilst enabling employers to retain the funds for as long as necessary – but no later than the employees’ retirement age.
When the new holiday legislation comes into force, employees will have accrued holiday entitlement under both the old and the new rules and will therefore, in principle, be entitled to double the amount of holiday entitlement in a single year. As this is not in the interests of the labour supply, the economy or employers’ liquidity, it has been decided to allow the employees' holiday allowance fund to manage the holiday allowances accrued under the old rules during the period from 1 September 2019 to 31 August 2020, until they can be paid out – typically upon reaching state pension age.
Responsibility for the new fund lies with LD Pensions, which, with the addition of this new fund, now manages two funds – Dyrtidsfonden and the Holiday Allowance Fund. Dyrtidsfonden has been managing frozen cost-of-living contributions dating back to 1980 and currently manages assets of DKK 39 billion on behalf of 600,000 members.
Find out more about the employees' holiday allowance fund
