Yield and hours of sunshine

Every six months, the ritual arrives - a new statement of pension companies' returns with a new winner and loser. In the first half of the year, Pædagogernes Pension yielded 12.1% and Industriens Pension 6.9%. The headlines write themselves, but can we actually use this for anything?
These are precise figures, but they say nothing about what Danes should do with their pensions.

The pension comparison is based on a single data point: What would a person with 15 years to retirement and "medium risk" have received?
This is equivalent to comparing the number of sunshine hours on Bornholm and Langeland on 1 May this year. It is measurable. But it doesn't help with packing your suitcase for the perfect holiday destination in August.
Instead, we should talk about and inform people about risk profiles, costs, and time horizons.

The risk profile: According to a statement from Danica, 70-80% of women and 60-70% of men save with "medium risk". This is the default choice, and it suggests that very few have actively made a decision. But the choice shifts more than you think. The analysis showed that 1 million invested in 2010 had grown to well over DKK 2 million with medium risk and nearly DKK 2.3 million with high risk. Around 300,000 on a single million, and the difference only grows larger over an entire working life. Medium risk may be a sensible choice five years before retirement. With 30 years to go, it is an expensive choice that most have never made consciously.

The costs: Lower costs are the only sure way to a larger savings pot. A difference of half a percentage point in annual costs sounds like little. Over a working life, it eats up a large chunk of the savings. For example, a difference of 0.5% compared to 1.0% will mean over DKK 4,000 more per month throughout retirement for a person who pays in 12% and earns DKK 40,000 a month. To get the same payout, the person with the high cost must therefore stay in the labour market for an entire year to pay their higher investment costs. So while returns look backwards, costs are one of the strongest indicators of how your savings will perform in the future. When the overview comes out next half-year, prices should therefore be what the companies compete on. That would be more useful.

The time horizon: The last thing few Danes adjust is how they want to retire. Same company, same customer, but 20 years to retirement instead of 15 yielded 9.69% in the half-year compared to 8.90%. Many Danes do not want to retire at the state pension age and want to either stop earlier or stay a few years longer, e.g. part-time. Your pension scheme must also be able to accommodate this. The longer the time to retirement, the more risk you can bear because time smooths out the fluctuations. It is therefore more relevant to ask whether your time horizon is correct than which company won.
 
Three things that Danes can influence themselves, and none of them are in a table of last year's winners.

So let's inform about what Danes can actually change, and not about which way the wind blew yesterday.