Like much of Europe, Sweden is finding to its cost that the state pension system is buckling under the weight of welfare state expectations and responsibilities.
After years of discussion, the government and opposition parties finally managed to agree on reform packages that come into effect this year. They will have a major effect on the manner in which contributions are put to work and on the pension received.
Under these reforms the AFP, or basic state pension, provides for a single person a maximum benefit after 40 years’ residence or 30 years’ service of 96% of a base amount, now worth Skr36,600 (e4,360). Spouses receive 78.5% of the base amount, with a retirement age of 65 for both sexes. One of the changes introduced this year allows retirement to be postponed until 70, with bonuses payable to encourage take-up.
Alongside the AFP there is a mandatory occupational pension, the ATP, a pay-as-you-go scheme linked to earnings. It is in this part of the first pillar that fundamental changes have been introduced. Employers will still contribute 6.45% of salary, divided equally between the AFP and the ATP. The current employee contribution of 18.5% will now be divided up. The pay-as-you-go ATP scheme will receive 16%, and benefits will be linked to average earnings rather than inflation. A new premium reserve pension (PPM) will receive 2.5% in the form of a defined contribution system.
These reforms also include changes to the AP Fonden, six funds under the umbrella of the earnings-related pension scheme. These are generally seen as a buffer fund for the ATP scheme. There are severe restrictions on half of these funds, which must have a minimum of 85% of assets invested in fixed income. The other three are severely limited in their foreign equity investment, indeed one is only allowed Swedish stock. From 2001 it is proposed that these funds be reorganised into four equal-sized funds with global mandates. There will also be a mandatory outsourcing of 10% of assets, and a losening on restrictions on foreign currency.
Some parts of the system are up and running, but the complete implementation of the scheme has been delayed until autumn 2000, some 12 months later than anticipated. In theory then individuals should be able to choose from hundreds or thousands of mutual funds. At the moment, however, the proceeds from the defined contribution are tucked away in the Bank of Sweden, earning a small amount of interest.
One of the problems for this scenario is the administration process set up around the new Premium Pension Authority (PPM). Managers wishing to participate in the new market must register with the PPM, which is proposing a trailer fee and a complex system which will see larger funds paying back a substantial part of their management fees whilst smaller funds retaining a larger share. These lower fee prospects have deterred some larger asset managers from tendering. Ironically, the government had expected to be inundated with applications, and feared that this could prove confusing for savers.
The Swedish market remains dynamic, however, despite the changes. It is estimated that the launch of the premium pension system will release Skr7bn on to the market, representing current accumulated funds and the annual contributions.
Second pillar provision, meanwhile, covers approximately 90% of the active workforce, via the compulsory scheme and a network of supplementary occupational pensions.
As in other Scandinavian countries, the social contract element of pension provision is well established. Wages and pensions are negotiated together, with the trades unions and employers keen to find common ground. Larger unions have been very influential, and supplementary pensions are provided via three main schemes.
The STP plan covers manual and semi-skilled workers, and has been transformed into a defined contribution scheme from the defined benefit scheme it was until 1996. Employees’ contributions are 3.5% of salary, and they are able to choose from a wide range of benefits. The ITP plan provides for salaried workers, and is surprisingly still a DB scheme. It is financed by employer contributions of around 9%, and supplemented by a DC scheme financed by employer contributions of 2%.
The fragmentation of the ITP system, and the failure of the employers association and the unions to agree on a defined contributions plan last year, cast a shadow over its future. As things stand members are unable to choose from a wider range of products, and the employer still has a large role to play.
Pension foundations are proving increasingly popular vehicles, especially among larger companies, but it will not be long before the parties sit down again, as they are swimming against the tide in Sweden where the trend is definitely towards defined contribution. As separate legal entities they are controlled by boards with equal employer employee representation.
A further plan covers Sweden’s 1m workers in the public sector. This has been converted into a hybrid scheme enabling the employee to place a part of the employers contribution of 3.5–4.5% into a mutual fund or insurance policy.