Balancing Capital Supply and Demand: Lessons from Denmark’s Pension System

By Christian Hyldahl, Head of Northern Europe & Senior Advisor, European Pensions for BlackRock

All markets rely on supply and demand, and capital markets are no different. For capital markets to flow into Europe’s broader economy, Europe must simultaneously address both sides of the equation: capital supply (including long-term savings) and capital demand (productive investment opportunities). This dual lever approach is essential for fostering innovation, job creation, and sustainable growth.

Among the most compelling examples of capital markets development in Europe is the Nordic region. One reason often cited is the region’s pension systems, which have contributed to the development of capital markets by providing a significant supply-side source of capital. However, it is critical to acknowledge an important distinction:

• There isn’t one Nordic model. Each country has developed at its own pace, with distinct strengths and policy choices. Careful consideration will be required to recognise these differences, and identify which elements can be extrapolated to other countries.
• Against this background, I will focus on the Danish pension system, examining its strengths and considering which aspects could be adopted by other countries.

A Multi-Pillar System Built on Broad Coverage and Flexibility

The Danish pension system combines a strong public pillar with robust occupational schemes, ensuring nearly universal coverage. Since the 1990s, occupational pensions have evolved from defined benefit (DB) to collective defined contribution (CDC) plans, offering a mix of lifelong payouts, lump sums, and time-limited annuity options that pay out over a fixed term. This layered structure has allowed the system to provide both security and adaptability across different income levels and employment types.

Incentives for Longer Working Lives and Inclusive Participation

To address demographic shifts, the focus over the last years has been to adjust the system to incentivise people to retire later. Denmark introduced automatic retirement age adjustments and made certain pension savings exempt from means-tested welfare benefit reductions – encouraging later retirement while maintaining fairness. The system also expanded mandatory savings to include unemployed individuals and is encouraging increased participation among the self-employed, pushing coverage above 90%. A pending discussion on early retirement for certain groups of workers (e.g. having worked for more than 45 years), and how to continue indexation of retirement age fueled by the latest increase in the retirement age to 70 years by 2040, will materialise over the coming years.

Trusted Governance, and Strategic Investment

High public trust has been maintained through strict fiduciary standards, with pension funds regulated under the ‘prudent person principle’ and overseen by the Danish Financial Supervisory Authority (DFSA). Transparency in fees and returns, along with individual choice in risk and sustainability preferences, helps to reinforce confidence and engagement.

Importantly though, Danish pension funds invest globally, guided by risk-return principles rather than geographic preference. While local investment is welcomed, it must meet competitive benchmarks. Policymakers recognize that stimulating attractive European investment opportunities is just as essential to match the system’s capital supply with productive demand.

Conclusion

To achieve widespread—and ultimately mandatory—participation in pension systems, close collaboration between governments and social partners is essential. Long-term alignment will require all stakeholders to see mutual benefits: employees accepting that part of wage growth is allocated to pensions, employers committing to contributing into the system, and governments providing tax incentives with an understanding that they will benefit from future tax revenues on pension payouts. This shared responsibility model, as demonstrated in Denmark, supports both individual security and fiscal sustainability.

Three key conditions are necessary for this alignment:

1. Acknowledging that current pay-as-you-go (PAYG) systems will become increasingly inadequate.
2. Strengthening trust in social partners to manage pension schemes effectively.
3. Ensuring tax incentives are material, stable, simple, and transparent.

Where full consensus is difficult, incentivised voluntary schemes (“opt-out”) with automatic enrolment can serve as a practical alternative. Additionally, tax-advantaged savings accounts can help individuals build wealth and channel capital into financial markets—an approach already showing positive results in several countries.

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