2020 was a record year for LD Pensions

Despite record-high payouts, the members’ assets for holiday allowance funds and cost-of-living allowance funds stood at DKK 89.4 billion at the end of 2020. This means that in the same year that LD Pensions is celebrating its 40th anniversary, its assets have also reached a record high.

LD Pensions manages both the Cost-of-Living Allowance Fund and The Holiday Allowance Fund, and as can be seen in the 2020 annual report, it is the holiday allowance funds in particular that have contributed to the record-high payout figure of DKK 56.4 billion.

Back in autumn 2020, early payouts of the frozen holiday allowance were made. A total of DKK 52.1 billion was paid out to employees. This provided a significant boost to consumption, as parts of the business sector had been adversely affected by COVID-19 restrictions for some time. The employees' holiday allowance fund currently has assets of DKK 57.3 billion. This figure represents employers’ calculations of holiday pay, less the total payouts made in 2020.

Payouts from the Cost-of-Living Allowance funds were also high. Denmark’s first lockdown in the spring of 2020 caused considerable turmoil in the financial markets, which led to payouts from the Cost-of-Living Allowance funds being increased significantly above the usual level. A total of DKK 4.1 billion was paid out from the cost-of-living allowance funds (an increase of 8.5% since 2019), of which DKK 1.4 billion represented advance tax payments to the state as a result of tax credits.

The frozen holiday allowance funds have increased by DKK 0.5 billion.

The frozen holiday allowance is held both by the Holiday Allowance Fund and by employers. Approximately 10% of the frozen holiday allowance, equivalent to DKK 10.7 billion, was held in the fund at the end of the year and is being invested by LD Pensions. The return on investment in 2020 was 3.8%, measured as a time-weighted return.

At the end of the year, 90 per cent of holiday allowance funds remained with employers, who, from 1 September 2020 onwards, must pay interest on these funds at a rate indexed to wage growth. LD Pensions has estimated the interest on these funds to be 1.3% on an annual basis, corresponding to 0.4% since 1 September.

The return on investment and interest payments on funds held by employers resulted in a total profit of DKK 693 million in 2020, of which the fund must pay DKK 123 million to the state as interest on the state’s financing of early pension payouts in 2020. This leaves a surplus for members of DKK 497 million after pension return tax and costs. This result should be viewed in the context that only a small proportion of the holiday allowance funds were invested in 2020, and only for part of the year, and that the interest payment on funds held by employers only covered four months, namely from 1 September to 31 December 2020.

LD Pensions has therefore increased holiday allowance funds by DKK 0.5 billion thanks to the fund’s results in 2020. For individual employees, this results in a positive adjustment to their accrued holiday allowance funds of 0.9% as at 31 December 2020. The 0.9% adjustment is after pension return tax and costs.

The cost-of-living allowance funds also emerged stronger from 2020

The total return on investment for the cost-of-living allowance funds breaks down as follows: DKK 769 million in LD Discretionary, which is LD Pensions’ largest investment portfolio and accounts for 88 per cent of members’ assets, and DKK 534 million in the other portfolios managed by The Cost-of-Living Allowance Fund. The total return on equities was 12.5%, whilst bond investments yielded 0.9%. In LD Discretionary, the total return on investment was 3.2%. The Danske Aktier portfolio delivered an exceptionally high return of 36.1%. The lowest return was achieved in LD Korte Obligationer, which stood at -0.2%.

In LD Discretionary, investments in high-grade bonds and shares boosted the result, with returns of 1.2% and 6.0% respectively. Credit investments dragged the result down, with a return of -0.2%.

Low operating costs in LD Pensions

Administrative costs amounted to 0.13 per cent of the assets of the cost-of-living allowance funds and just 0.02 per cent of the assets of the holiday allowance funds. The extremely low costs for holiday allowance funds are partly due to the fact that a portion of the ongoing administrative costs is covered by employers. For the cost-of-living allowance funds, costs have increased as a result of expenses associated with switching to a new provider for pension and member services. However, this has not placed a burden on members, who have continued to pay 0.08% of the assets in ongoing administration contributions.

Key facts

LD Pensions

• The total assets in LD Pensions at the end of 2020 stood at DKK 89.4 billion. Of this, cost-of-living allowance funds accounted for DKK 32.1 billion and holiday allowance funds for DKK 57.3 billion.
• The consolidated return on investment for LD Pensions was just under DKK 1.9 billion, of which just over DKK 1.3 billion was attributable to cost-of-living allowance funds and just under DKK 0.6 billion to holiday allowance funds.

The Holiday Allowance Fund

• 3 million members
• Assets of DKK 57.3 billion
• Return on investment of 3.8% (time-weighted)
• At the turn of the year, employers’ statements were available showing employees’ accrued holiday allowance funds for the period 1 September 2019 to 31 August 2020. The figure stands at DKK 108.3 billion, which was the amount that, according to the original plans for the Holiday Allowance Fund, should have been frozen and paid out as employees left the labour market.
• Total early payouts of the frozen holiday allowance in 2020 amounted to DKK 52.3 billion. Just over DKK 52.1 billion was paid out in connection with the early payment of up to three weeks’ holiday allowance funds in autumn 2020. A further DKK 0.1 billion was paid out in connection with the 2020 Holiday Advance Scheme.
• When the employees' holiday allowance fund reopens for payouts of the frozen holiday allowance at the end of March 2021, everyone will be able to see a return on their outstanding holiday allowance. The return is updated once a month (on the 8th banking day of the month) based on the fund’s monthly performance. The return shown at the end of March is based on the fund’s performance for 2020 plus that for January and February 2021. Only a net return is reported, i.e. the return after pension return tax and costs have been deducted. The return is therefore not directly comparable with returns on investment funds and pension products.
• Employees still have over DKK 57 billion in outstanding holiday allowance, which could potentially be paid out once the government’s proposal for a second round of early payouts has been passed by the Danish Parliament. Based on experience from 2020, it is estimated that a total of DKK 37–46 billion will be paid out in spring 2021, from which tax will be deducted. The remainder will remain in the scheme to continue earning interest.

The Cost-of-Living Allowance Fund

• 503,005 members.
• Assets of DKK 32.1 billion.
• Return on investment of 3.2%
• The Cost-of-Living Allowance Fund offers its members the opportunity to invest in various portfolios. This can be done at very low cost. For example, funds can be invested in a portfolio of global shares with annual investment costs of 0.50 per cent. In addition, account management fees will amount to a maximum of 0.18 per cent. These are attractively low costs.