The Danish Parliament has decided that, this autumn, you will be able to have three out of five weeks’ worth of frozen holiday allowance paid out. This is holiday allowance that would otherwise have been transferred to a pension savings scheme with the Holiday Allowance Fund. However, it is up to you whether you wish to have the three weeks’ holiday allowance funds paid out, which has raised a lot of questions.
We have asked Director Dorrit Vanglo 10 questions about the frozen holiday allowance.
For example, is it worth leaving the money with the employees' holiday allowance fund?
Or why won’t I be paid my full five weeks’ holiday pay this autumn?
Read on here.
1. Why can’t I have my holiday allowance funds paid out until the autumn?
Originally, the plan was for us to start making payouts in early 2021 – that is, to those who had since become eligible for payouts. This means that the system needed to handle the payouts has not yet been developed at all. So this is simply the earliest date that is technically feasible.
When the Danish Parliament decided to freeze holiday pay, it took into account that employers are required to calculate and report the amount to which each individual is entitled. It is a new requirement for employers to report on the very large group of employees who receive pay whilst on holiday. For this reason, amongst others, employers have until the end of 2020 to comply.
After all, it’s important that we have a reasonable idea that people are being paid the correct amount. There needs to be a link to what people have earned; otherwise, we might as well just send a sum of money to everyone.
2. If I choose to have my holiday allowance funds paid out, will I be short of holiday pay when I retire?
Under the old holiday legislation, the situation has always been that you keep putting off taking your holiday. What you accrue one year, you carry over to the next. This means that, if you look at your working life as a whole, you end up with holiday entitlement to take just before you retire. That’s not the intention under the new holiday entitlement legislation. But then, of course, you can use the frozen holiday allowance instead.
So yes, there will be a shortfall in that a great many people are leaving the labour market by taking the holiday entitlement they have built up before they retire. You won’t have that option now if the majority of your holiday allowance funds have been paid out and you only have holiday pay under the new holiday pay legislation. So if you’d like to have that option, it’s a good idea to leave the money in your pension savings – because that’s essentially what it is.
3. If I can’t get the frozen holiday allowance paid out until October anyway, why can’t I get all five weeks paid out, given that by then I will have earned all the holiday allowance funds from the transitional year?
When the transition year ends, a process will begin whereby employers must ensure that they submit their reports. This must be done by the end of 2020. Employees will then be consulted to see whether they agree with the reports submitted by their employers. This will take a few months, as the employer and employee must actually clarify whether they both agree that this is the correct report. The fund has no means of independently verifying that the amounts are correct. It is therefore important for both employers and employees to go through this thoroughly to ensure that the holiday pay has been reported correctly. This process will not be completed until sometime in spring 2021, which is why it is not possible to simply pay out the full amount in October. At that point, we will not yet know exactly how much money it will amount to.
4. So does that mean there’s some uncertainty surrounding the payouts this autumn? Could I receive the wrong amount, which I would then have to pay back?
This will be a provisional calculation of the amount accrued. The payouts will be offset against the holiday pay that remains frozen. For the vast majority, this will be done by offsetting it against the remaining two weeks’ pay.
5. You were promised around 100 billion Danish kroner for investment. Now, a political decision has taken 60 billion of that away, leaving you with only 40 billion Danish kroner for investment. Can you even draw up a sound investment strategy under these circumstances?
Yes, I certainly believe we can. Firstly, it was never the intention that we should invest 100 billion Danish kroner from the outset. The funds we are to invest are those that employers choose to contribute voluntarily. Secondly, it’s worth noting that this money is being added on top of the funds in our other fund, The Cost-of-Living Allowance Fund. In other words, it’s far more than we’d expected to have when we only had the cost-of-living allowance funds. And if we assume that we will receive DKK 40 billion in contributions over time, well, then the fund’s assets will be greater than they have ever been in the entire history of Dyrtidsfonden.
Furthermore, we have structured our operations in such a way that costs are heavily dependent on the amount of money we have under management. This means that the less money we have, the lower the costs will be. So we can easily achieve cost-effective administration.
6. I’ll still have two weeks’ holiday allowance funds left in my savings account with you. Can I choose to have only some of the three weeks’ holiday allowance funds paid out and leave the rest in my savings account?
I don’t think we can manage that. It sounds so simple, but every time you change a main track and create a few different sidings for a system, it incurs development and administration costs. And keeping costs down is a really important factor, because otherwise there won’t be any room for a return on investment for people. You don’t always think about what it is that costs money. Certain procedures and system developments are needed to make this work. And we need to ensure that only a partial payment has been made, and so on. When you look into it, it’s not quite as simple as it appears at first glance.
7. Employers can choose to keep the holiday allowance funds within their companies. If the majority choose to do so, how can you make the holiday allowance funds grow? Surely you won’t have anything to invest in that case?
The way it works is that the money companies pay in voluntarily is invested, and we then receive a return on that investment. As for the money that companies choose to retain within their organisations – for example, because they lack the liquidity to pay – they are then required to make an annual index-linked payment. This means they will owe more and more year on year, as they must increase the original amount by an indexation figure corresponding to wage growth each year. And this will contribute to the positive growth of the total funds, which will in due course benefit all members when the holiday allowance funds are paid out.
It could be said that the indexation which employers are required to provide will help to ensure that there is a certain degree of stability in the trend.
8. Does it matter to me, as an employee, what my company chooses to do?
No, it hasn’t, because it all adds up to one big calculation, where the money we can earn from investments and the indexation that employers owe are added together and distributed amongst all the members who are due money from the fund.
9. What would you recommend regarding my three weeks’ holiday allowance funds? Should I choose to have them paid out, or should I leave them with you?
The whole idea behind these funds now being paid out is, of course, that politicians have wanted to boost the economy by encouraging people to take the money and go out and spend it. So if there’s something you’d like to spend the money on, then I certainly think you should have it paid out. What might not be such a good idea is taking the money and then putting it in the bank. Because I don’t know many people who are currently earning interest on their money in the bank. And so they might be better off leaving it with us as a pension savings scheme. But we don’t offer any advice or recommendations in that regard. It’s up to people to decide what they want to do with their money.
Many of our members in The Cost-of-Living Allowance Fund have said that they have been very pleased to have had an additional and substantial pension savings pot, which they have been able to withdraw many years later, even though they were unhappy when the cost-of-living allowance funds were frozen at the time.
10. If it is decided this autumn to pay out the remaining holiday allowance funds as well, so that there are no holiday allowance funds left in the Employees' Holiday Allowance Fund, what will happen to your other fund, the Cost-of-Living Allowance Fund – will it be able to survive?
Well, you could say that, in a sense, the situation isn’t any different from what it was a few years ago, before all this business with holiday allowance funds came up and became a new option. So we’re continuing on the basis that the cost-of-living allowance funds have operated on for 40 years now, and it’s clear that at some point the assets will become so small that it won’t make sense to maintain an independent administration any longer. At that point, we’ll have to look at how to wind it down. But that won’t be an issue for the next few years, at any rate.
