Sweden: Trend is set to DC
Competition between providers is likely to become tougher – according to SIRP
The present pension system consists primarily of two parts, the national basic pension and the supplementary pension scheme (ATP). Also included in the public pension system are government housing supplements and a separate system of partial pension for those between 61 and 64 years of age.
The national basic pension is the same for everybody and provides a single person with 96% of a base amount. Married persons receive 78.5% of a base amount.
Everyone who has worked for at least 30 years is entitled to an unreduced national supplementary pension. The pension will then be 60% of the average pensionable income in the 15 best years. Pensionable incomes are incomes over one and under 7.5 base amounts.
The national supplementary pension scheme favours those who, over their working life, have had an uneven flow of income or who have worked a shorter period in life. It is disadvantageous for those who have had an even income and worked for many years.
A new old age pensions system was decided in 1998. The first pay-outs will be in 2001.
Pensions are primarily to be based on lifetime income. This will include incomes from employment and business activities, as well as sickness benefit, parental benefit and other social security benefits. Some 18.5% of the individual’s lifetime income is to be paid into the pension system earnings. Yearly incomes, including social security benefits, to a limit of 7.5 times the base amount, will carry pension rights. Sixteen percentage units of 18.5 percentage units will be used to finance the PAYG part and 2.5 percentage units of the 18.5 percentage units contribution will be saved and will earn interest in a premium reserve account. The insured can choose an investment manager for his or her premium reserve pension.
Contributions to the PAYG scheme as well as payouts from that scheme will be linked to economic growth. Pensions will be pegged to average income growth.
At retirement the pension entitlement will be calculated to a yearly pension, according to primarily the average life expectancy at the time of retirement.
Those who have not been employed, or have only earned a small income are to be guaranteed a minimum pension.
The new system will be introduced gradually. Those born in 1937 and earlier will receive a supplementary pension according to the old rules. Those born between 1938 and 1953 will receive part of their pension according to the rules of the old system and part according to the new rules through a 20 part gradual introduction of the new system. Those born in 1954 and later will receive pensions entirely according to the new rules.
The second pillar in Sweden
In Sweden, second pillar pension benefits for almost all wage-earners and salaried employees are determined by nation-wide collective agreements on pension schemes and other retirement provisions. Almost all employees (90-95 %) in the private and public sectors are covered by such schemes.
Almost all wage earners within the private and co-operative sectors are covered by insurance contracts with AMF Pension KP Pension&Försäkring (a friendly society). The social partners exercise joint influence over management and administration via boards of directors and advisory councils. The pension schemes have recently been changed from defined benefits (DB) to defined contribution (DC) schemes, the contribution being 2% of the wages. The members may choose the fund manager for their contributions.
Most salaried employees are covered by the ITP scheme which is based on collective agreement between the Swedish Employers’ Confederation and the trade unions for salaried employees within the private sector. The ITP scheme is a DB scheme, supplemented with a DC scheme (ITPK), the contribution being 2 % of the salary.
The old age pension may be either insured with SPP Mutual Insurance Company or registered with PRI – the Pension Registration Institute and covered by book reserves and insolvency insurance (with FPG – Pension Guarantee Mutual Co).
There is an option for the employees to choose other insurance companies than SPP for the defined contribution part of the scheme (ITPK).
There are several pension schemes, similar to ITP, the benefit level being mostly the same as with ITP. These schemes are insured with friendly societies or with life assurance companies. They may also be covered by book reserves combined with insolvency insurance.
Employees with local government
All employees with local government (county councils and local authorities) are covered by a DC pension scheme. The general contribution is 3.4 % of salaries and wages, for some groups 3.5 % or 4.5 % for incomes up to the social security ceiling and 1 % over the ceiling. The contributions are booked on an individual account with the employer. The accrued sum is granted interest. As from 2000, 1 % of the total contribution will be funded externally in a fund of the employees’ own choice. For incomes over the social security ceiling, the employee is entitled to DB at about the same level as in the former DB plan.
Second pillar – recent expected changes
Negotiations for a new pension plan for salaried employees has been going on for several years but the social partners have still not come to an agreement. It is expected that the new pension plan be a DC of 4% up to the social security ceiling and DB of 65% of end salary over the ceiling. The members may choose insurance company/fund manager for the DC part of the plan.
The contribution to the wage earners pension plans is expected to rise from 2% to 3.5% or more in the next coming negotiations.
In the Swedish Pension Society (SPP), a considerable overfunding has accrued. The main part of the overfunding will be distributed to the sponsoring companies and the members. SPP’s decision to turn the overfunding to contribution holidays has been criticised by other insurance
companies and raised questions from the Competition Authority. This is just an example of hardening competition between the providers, which may be still harder in the future.
When the new DC plan for salaried employees is launched, there will be almost no DB plans for incomes up to the social security ceiling – only central government’s supplementary pension scheme. Central government is expected to follow the general trend for DC plans.
Swedish Association of Institutions for Retirement Provision
SIRP -The Swedish association of institutions for retirement provision managed by social partners
Chairman: Jan-Erik Erenius
General Secretary: Georg Hagström
Address:Grangärdevägen 7, S-167 75 Bromma
Telephone: +46 8 25 03 57
Facsimile: +46 8 25 02 83
Gross Domestic Product: Skr1, 873bn (1998, Current Prices)
Population: 8,857,361 (June 30, 1999)
Funded retirement assets (end 1997 in SKr)
Externally funded through corporate pension foundations: 90,000 (estimated)
Externally funded through insurance contracts: 658,343
Book reserves within sponsoring employers: 86,522
The Swedish Association of Institutions for Retirement Provisions managed by social partners (SIRP) is the national association for second pillar institutions in Sweden. SIRP was formed in 1993 by six providers of retirement provisions in the private, the co-operative and the local government sectors to take care of their special interests, which were not considered by existing associations in Sweden.
The objects of the association are:
l to follow the development of occupational plans, primarily in the member states of the EU (second pillar in the three pillar system)
l to inform about development in the above mentioned area
l to be a forum for discussions in these questions among the members
The members of SIRP are the 14 main providers of retirement provisions in the sectors mentioned above.