is deducted from the annual contribution to cover the cost of survivor benefits, which resemble term life insurance. The premium is determined after taking into account the value of accumulated pension rights. A premium refund is paid to older members whose accumulated pension rights exceed the value of the survivor benefit. The net contribution amount is taken into account in calculating the pension benefit.

The normal retirement age was lowered to 65 from 67 for the universal pension and also for ATP benefits in 2004. However, a new law provides for its gradual increase back to 67 between 2024 and 2027. After 2025 the normal retirement age will be indexed to life expectancy.

Workers are allowed to claim their ATP benefits later, up to age 70, with actuarially increased benefits. Retiring at 65 rather than 67 also results in lower benefits. From 2009, workers will be able to postpone ATP benefits up to the age of 75. This was motivated by the current mismatch between increased life expectancy and the growing use of term annuities (for 5 or 10 years) from occupational schemes (ATP 2006:12).

There is considerable uncertainty about longevity trends. ATP reports that life expectancy experienced a large increase of almost 1 year between 1999 and 2004, which corresponded to the total increase between 1950 and 1999. Life expectancy increased by 4 months for men, 3 months for women during 2005. Statistics Denmark reports that life expectancy in Denmark is one of the lowest in Western Europe. It has stagnated for a long time, although the trend has become positive again in recent years (Statistics Denmark 2007). In the period 1995-1999 there was an excess mortality compared to Sweden that was attributed to differences in lifestyle with regard to smoking, alcohol, diet and physical activity. However, the proportion of smokers fell from about half of Danes in 1980 to about a fourth 25 years later.

Before determining the annual bonus and the amount of surplus that will be transferred to the bonus equalization fund, which is also referred to as bonus potential, ATP makes annual additions to its guaranteed benefit pension reserves to cover the impact of increasing longevity. This reflects the risk-sharing arrangements that ATP operates with both active and passive workers. The annual additions to reserves to cover the future financial impact of increasing longevity have fluctuated widely from year to year. Between 1999 and 2006, they have ranged between 0.5 and 4.2 percent of guaranteed benefits. ATP reports provide little analysis of the justification of these increases and their erratic behavior, other than indicating that longevity is increasing. No specific information is provided on the evolution of life expectancy of its active and passive members and no comparison is made with the life expectancy assumptions used in calculating deferred annuity conversion factors.

The bonus potential fell to just over 7 percent of total pension liabilities in 2002 but recovered more recently and reached 19 percent in 2006 (Table 3). Annual bonuses depend on the relationship between the bonus potential and pension liabilities. Since 2002, an annual bonus of 2 percent has been paid to both active and passive workers on their rights based on post-2001 contributions, but no bonus has been allowed on pensions 9