Chapter 4 - Pay and pension

Pay formation in the Danish state sector

Ministries, government agencies and institutions are basically free to recruit personnel according to local wishes and needs, but within certain limits. For payroll- operated institutions (typically ministries and agencies), the primary limitation is the total payroll. For framework-financed institutions (for example universities and vocational schools), the limitation lies in the total budget. The pay of central government employees is fixed in different ways for various types of employees. For the highest-ranking managerial positions in the state sector, both the number of positions and the total pay for the individual positions are fixed centrally. For other positions, the point of departure is that the classification/basic pay is fixed centrally and, in addition to this, there is a possibility of allowances subject to local negotiation.

The possibility of granting allowances in addition to centrally fixed pay varies depending on the level of the position, as well as on whether the position is subject to the old or the new pay system. The differences are described in the paragraphs below.

Pay adjustment scheme

In the Danish state sector, a pay adjustment scheme has been agreed which ensures that the pay of state employees in general and over a long period of time develops in parallel with the wages and salaries in the private sector. The pay adjustment scheme automatically adjusts the central government pay development to the private sector pay development, but subject to a certain time lag.

The key mechanism of the scheme is that pay increases on the private labour market are compared with pay increases in the state sector. In case of a difference, 80 per cent of it will be realised in the subsequent pay settlement period as adjustment of the central government wages and salaries.

If the state sector pay development is below that of the private sector, the state sector wages and salaries will be adjusted upwards in the subsequent pay settlement period. If the opposite is the case, the central government wages and salaries will be adjusted downwards.

The pay adjustment scheme means that the pay development of the state sector in the long term will fluctuate according to the pay development of the private sector. This means that it is the private sector pay development that sets the actual standard for the size of the total central government pay development.

Job monitoring

Apart from the budgetary restriction, there is particular monitoring of the number of positions that are classified at the top salary levels, for example managerial positions. Before a position at the level of head of division or above can be established, it must be approved by the Ministry of Finance and the pay level is, furthermore, subject to agreement between the Finance Ministry and the central organisation. This procedure ensures that the number of positions at top salary levels does not increase in an inexpedient manner. Furthermore, the procedure gives consideration to the cross-departmental matter of ensuring uniformity in the classification of the highest-ranking positions.

Permanent secretaries etc

With respect to the highest-ranking managers in the individual ministries, the permanent secretaries, the Chief of Defence and the Supreme Court President, both classification as well as allowances for the individual permanent secretaries etc are subject to decision at central level.

Once a year, the Ministry of Finance together with the Prime Minister's Office makes a decision on the granting of personal salary improvements for the permanent secretaries and the Chief of Defence. In connection with the assessment of the major tasks and results of the past sessional year of the Folketing, a review will be carried out of how any permanent secretary or the Chief of Defence has managed and developed the ministerial area and performed any cross-departmental tasks.

Wage reform

Since 1998, a wage reform has been implemented in the Danish state sector. Under this reform, a great number of state employees have changed from old to new pay systems.

Figure 3: Developments in the number of employees (man-years) on the new pay systems

The wage reform implies

• that pay formation is decentralised to local level where there is maximum knowledge of the actual working conditions and the qualifications and effort of employees,
• that the pay development of employees is to reflect the performance and qualifications of the individual staff member to a greater extent than previously and
• that pay is to be seen as a management instrument to help motivate employees and to achieve a more effective state sector.

The wage reform is an integral part of the personnel and management policy in the state sector.

Prevalence of the new pay systems

The first wage reform agreement came into force at the beginning of 1998 when approximately three per cent of state employees were included in the new pay systems. Since then, the percentage has gradually increased. Today, more than half of all state employees are comprised by the new pay systems, which cover the state area to a broad extent and apply to general staff members as well as managers.

The new pay systems are particularly prevalent in the area of academic staff and the educational area, where practically everybody is included in the new pay systems. Similarly, the majority of office staff are employed under the new pay systems.

With respect to managers, the vast majority of these are comprised by the new managerial pay agreement. A great number of managers within the educational sector are also subject to new pay systems.

Structure of the new pay systems

The most prevalent new pay system model is the basic pay rate system. The basic pay rate system consists of a basic pay rate or a basic pay rate interval, which is agreed centrally, together with a superstructure in the form of an allowance component, which is agreed locally. The new basic pay rates hold typically no or only a very small number of automatic seniority-related pay increases. Individual pay development has thus been decentralised to the individual state sector place of work.

One of the objectives of the wage reform is for a greater proportion of the pay formation to take place at decentralised level in the form of local pay formation.

The State Employer's Authority aims at raising the local allowance proportion of the total payroll for employees on new pay systems.

Locally agreed allowances comprise functions-related allowances, qualifications- related allowances and a one-off payment. Furthermore, performance-related pay is also an option.

Figure 4: New pay systems - centrally and locally agreed pay

Text box 1: Types of allowances under the new pay systems.

New pay system for managers

In 1999, the wage reform was further developed with the addition of a new managerial pay agreement. The objective was to achieve greater flexibility regarding the remuneration of managers.

The pay level classification has been retained in the form of a fundamental, centrally agreed basic pay rate. However, liberty of action has been noticeably increased regarding the superstructure.

One-off payments, permanent and temporary allowances are fixed subject to negotiation with the individual manager.

Since 1995, it has been possible for directors general of government agencies to enter into performance pay contracts in order to establish visible correlation between performance and pay, please see text box below.

Text box 2: Contracts of directors general in the Danish state sector.

Old pay systems

Employees on the old pay systems are remunerated either according to the wage system of civil servants; the salary grade system or other centrally agreed pay scales.

It is a common characteristic of the old pay systems that they typically hold long pay intervals with many salary grades, and that employees move up automatically in connection with increasing seniority.

The civil servants' wage system consists of a pay scale of 55 salary grades. These salary grades constitute the framework for a number of salary levels, each of which comprises one or more of these salary grades. At the bottom of the scale, the pay intervals are the longest i.e. they contain the greatest number of salary grades. Subsequently, they become shorter and shorter, the higher the employee rises on the scale. The ten highest salary levels comprise only one salary grade.

A position is classified depending on the most important tasks and the responsibility linked to the position as well as any particular education and experience-related requirements.

A civil servant's salary seniority means the time the person in question has been employed at the salary level at which the individual position is classified. If the salary level consists of several salary grades, a change to the next salary grade will take place after (normally) two years, depending on the pay interval agreed.

In addition to the salary grade pay, allowances are granted in a number of cases as a permanent part of the remuneration to compensate for i.a. an obligation to be at the disposal of the institution, overtime work, inconvenience etc. Furthermore, the salary grade system contains a certain degree of geographical differentiation according to which Danish municipalities are divided into five different local-allowance areas. The division into local- allowance areas has taken place on the basis of

• wages and salaries on the private labour market in the municipality
• the level of prices in the municipality
• taxation in the municipality

The old pay systems are characterised by centrally agreed pay elements, which means that there are only limited opportunities of local allowance formation.

Pension

The vast majority of central government employees are covered by a statutory labour market pension scheme or a labour market pension scheme under a collective agreement. In addition, all employees receive the Danish Labour Market Supplementary Pension (ATP), which is a mandatory pension scheme for all wage earners in Denmark. Like all other citizens in Denmark, state sector employees are included in the social pension system. It means i.a. that they receive the flat-rate state pension when they reach the age of 65.

Staff employed under a collective agreement

Staff employed in the state sector under a collective agreement are covered by collective pension schemes based on pension funds or insurance companies.

These pensions are financed by pension payments made by the employee as well as the employer. The pension payment varies according to the collective agreement area. The employee pays from four per cent to six per cent of the pensionable salary, whereas the employer pays twice the amount.

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Employment in the Danish State Sector

The main elements of the pension schemes are retirement pension, disability pension (if a person's working capacity is reduced by 2/3 or more), children's pension and often also a spouse's pension scheme.

According to actuarial principles, the pension is calculated in relation to the amount paid into the scheme. A spouse's pension typically constitutes from 40 to 60 per cent of the retirement pension and the children's pension normally 10 per cent of this (20 per cent for orphans).

Since the introduction of these pension schemes, the state has set out a number of requirements regarding the composition of benefits of the schemes. The trend is towards opening up more flexible schemes and making it optional for the individual, within the given framework, to invest part of his/her own pension contribution.

Civil servants

Pensions for civil servants are regulated under the Civil Servants' Pension Act. Civil servants are entitled to a pension in connection with the termination of his/her employment due to age, infirmity or any other cause that is not attributable to the civil servant. The civil servant's spouse and children are also secured a pension if the civil servant dies.

There are approximately 83,000 retired civil servants, 29,000 spouses of deceased civil servants and 5,000 children of deceased civil servants. There are approximately 105,000 employees entitled to a civil service pension from the state.

The pensions are financed by the Budget.

The pension is calculated on the basis of the civil servant's pensionable salary on the date of retirement and the accumulated pensionable service of the civil servant. The term of the pensionable service is calculated from the civil servant has attained the age of 25 at the earliest, and the maximum pensionable service is 37 years.

Certain groups of civil servants, among others military personnel and employees in the police force have a lower mandatory retirement age that the ordinary mandatory retirement age of 70. For these groups, special rules have been established regarding the accumulation of pensionable service.

After 37 years' pensionable service, the maximum pension amounts to 57 per cent of the pensionable salary.

In addition to the percentage of the pensionable salary, pensioners who have not attained the age of 65 receive a supplement that is included in the total pension. When pensioners reach the age of 65 and consequently are entitled to the flat-rate state pension, the pension supplement ceases to exist.

Civil servants are entitled to retirement pension in connection with their retirement after having reached the age of 60. In connection with retirement at the age of 60-64, a deduction will be made in the civil servant's pension. The deduction totals from ten per cent to two per cent, and it is permanent. In connection with retirement before the civil servant has attained the age of 62, the pension will furthermore be reduced by an amount corresponding to 50 per cent of the supplement granted to pensioners below the age of 65.

A civil servant is entitled to infirmity pension when dismissed due to sickness if the person in question has been employed for at least ten years. Civil servants who on the date of dismissal have lost at least 2/3 of their working capacity are entitled to qualified infirmity pension in connection with retirement before they have reached the age of 60. In this case, there is no requirement of ten years' service. The pension will be calculated on the basis of the pensionable service that would have been accumulated at the mandatory age of retirement.

Civil servants who have performed at least ten years' service and who are dismissed for another reason than age and infirmity and which is not attributable to any fault of their own will have their pension calculated on the basis of the pensionable service accumulated on the date of dismissal. Another non-attributable reason will typically be that the position is abolished or that the civil servant for other reasons than sickness is not in a position to carry out his/her tasks. If it is a matter of abolition of the position, the civil servant will receive the salary he/she has received so far for a period of three years prior to transition to pension. The three years will be included in the pensionable service.

If a civil servant leaves his/her position before having attained the age of 60 without being entitled to current pension, the person in question will receive a deferred pension, which is calculated on the basis of the pensionable service accumulated on the date of resignation. The deferred pension depends, however,on at least three years' pensionable service and may not be paid out until the person in question has reached the age of 60 with a deduction as mentioned in the above. Payment may, however, also take place from the date when the former civil servant's employability might be reduced by at least 50 per cent.

If a civil servant or retired civil servant dies, the surviving spouse will receive a pension, which normally totals 71 per cent of the deceased's pension. This entitlement also applies to a registered partner.

Any children below the age of 21 of a retired civil servant or deceased civil servant are entitled to a pension until they have reached the age of 21. Orphaned children are entitled to twice the amount.