Until the early 1980s, many employees had their wages automatically adjusted for inflation whenever the price level rose. The adjustment was intended to offset price rises and safeguard real wages.
Under the August Agreement of 1976, a broad majority in the Danish Parliament decided that if price rises triggered more than one cost-of-living adjustment per half-year, the additional cost-of-living adjustments should not be paid out as wages but should be frozen. This put a damper on wage growth in order to limit price rises. This involved two frozen cost-of-living allowances, which the State deposited into 2.5 million individual employees’ accounts in 1980.
The frozen seniority-based pay increments were converted into personal savings, which would later be paid out to the individual employee as a lump sum whenever they wished, provided they had reached the age of 60.
Investment strategy for the cost-of-living allowance funds
The investment policy for the Cost-of-Living Allowance Fund is based on the expected development of members’ assets. LD Pensions prepares multi-year forecasts for the development of assets and operates on the basis of a baseline scenario in which the assets of The Cost-of-Living Allowance Fund are expected to fall by approximately 30 per cent over the next five years.
The investment policy is structured to take account of the uncertainty associated with members’ withdrawal behaviour. Many members choose to defer their payouts for a few years, and LD Pensions therefore manages substantial funds on behalf of members eligible for payouts. The assets of members eligible for withdrawal account for approximately 60 per cent of total assets, and this places specific demands on LD Pensions’ investments, which must be relatively liquid.
