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Pension Reform in the Nordic Countries

Pension Reform in the Nordic Countries. A Model for the Other EU Member States? Arne Paulsson SIA Sweden CICERO FOUNDATION SEMINAR PARIS - 11 MAY 2007. What´s common for Nordic Pension Systems. Basic Security – guaranteed by the State Earningsrelated supplements

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Pension Reform in the Nordic Countries

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  1. Pension Reform in the Nordic Countries A Model for the Other EU Member States? Arne Paulsson SIA Sweden CICERO FOUNDATION SEMINAR PARIS - 11 MAY 2007

  2. What´s common for Nordic Pension Systems • Basic Security – guaranteed by the State • Earningsrelated supplements • Means-tested support for the poor • Universal benefits • Individual rights

  3. Different Designs Sweden Basic security and mandatory Norway earningsrelatedsupplement by Finland public law Denmark Basic security by public law and Iceland earningsrelated supplement by occupational systems

  4. Recent Pension ReformsinSweden Finland Norway • Finacially stable Pension System to meet the future demographic and economic conditions • Politically stable Pension System by a broad political support in the Parliament

  5. Swedish Reform – time schedule • 1984-1990 Pension Comission • 1991-1994 Working Group on Pensions • 1994 New System approved in Parliament • 1998 Final Legislation approved • 1999 New System comes into force • 2003 New System fully implemented

  6. Main Features of the Swedish Pension System • Defined Contributions – NDC 16% (Pay-as-you-go) – FDC 2,5% (Funded) • Lifetime earnings • Rate of return – NDC: wage index – FDC: financial market

  7. Main Features of the Swedish Pension System • Benefits based on life expectancy at retirement • NDC – automatic balancing • Transitional rules • Guarantee pension – basic protection (general tax financed)

  8. Pensionable income 2,5 % 16 % Funded Pay-as-you-go Every contribution give corresponding pension credit, the whole life SEK

  9. Pension rights • Pensionable earnings • wages • social insurance benefits • Pensionable amounts • children under 4 years • disability pension • higher studies • military service

  10. NDC Account Index- ation Account Value 1/1 Adm. Costs Pension Rights Survivors Bonus Account Value31/12 Year 1999 851 832 35 100 1629 15 372 -143 903 790 2000 903 790 35 712 1969 13 605 -436 954 640 2001954 640 35 808 2074 28 468 -367 1020 623

  11. Annuity calculation NDC Account value at retirement Annuitization divisor Annuitization divisor is calculated from unisex life expectancy at retirement age and an interest rate of 1,6 % Annuity =

  12. Retirement • From the age of 61 • NDC-pension, FDC-pension or both • 25%, 50%, 75% or 100% of benefit

  13. Pension as an annuity Imputed interest 0,0 % Growth 1,6 % PENSION FIXED PRICES ..interest 1,6 % Growth 1,6 % AGE

  14. Norway • Pension rights accrued by 1,35 % of earnings annually • Lifetime earnings count • Pension rights indexed by wages • Retirement age 62 – • Life expectancy affects pensions • Pensions indexed 50/50 by prices/wages

  15. Finland • Pension rights accrued by 1,5 %(age 18-52), 1,9 %(age 53-62) and 4,5 %(age 63-68) • Pension rights indexed 20/80 by prices/wages • Retirement age 63 – 68 • Life expectancy affects pensions • Pensions indexed 80/20 by prices/wages

  16. Cohort born .. turns 65 year Forecasted divisor (at 65) Effect on pension, relative to cohort born 1940 Required delay of retirement age to offset effect of increase in divisor Effect from forecasted increase in life expectancy 1940 2005 15.6 - - 1945 2010 16.0 -2% + 5 months 1950 2015 16.3 -4% + 9 months 1955 2020 16.6 -6% + 13 months 1960 2025 16.9 -8% + 16 months 1965 2030 17.2 -9% + 20 months 1970 2035 17.4 -10% + 23 months 1975 2040 17.6 -11% + 26 months 1980 2045 17.8 -12% + 28 months 1985 2050 18.0 -13% + 29 months 1990 2055 18.1 -14% + 30 months

  17. For those born 1938-1953 Försäkringskassan och Riksförsäkringsverket 1999 5

  18. 140 000 120 000 100 000 80 000 Income-related pension 60 000 Guarantee Income related + guarantee 40 000 20 000 0 42 000 100 000 0 Income-related pension Guarantee pensions Basic security for those with low or no income-related pension 140 000 120 000 100 000 80 000 Income-related pension 60 000 Guarantee Income related + guarantee 40 000 20 000 0 42 000 100 000 0 Income-related pension

  19. Balanstalet + Fund Contributions Asset = Balance ratio Pension Liabilities

  20. In average year 2000: 43 years age 76 years age Wait… Contributions Payments 33 years 15 15 20 20 25 25 30 30 35 35 40 40 45 45 50 50 55 55 60 60 65 65 70 70 75 75 80 80 85 85 90 90 100 100 95 95 age Time is money... Payments Contributions age

  21. Exp. turnover durationcontributions The present value of contribution flow, i.e. the contribution asset, is calculated as:

  22. Fund Fund 550 mdr. SEK 577 mdr. SEK Pension Liabilities ContributionAsset 5 465 mdr. SEK 5 984 mdr. SEK The Balance Sheet in 2003 Balance Ratio = 1.0097

  23. 150 145 Income index 140 135 130 125 Balance index 120 faster indexation 115 110 slower indexation 105 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Income and balance index Year

  24. Key FiguresBillions of SEK 2006 2005 2004 2003 2002 Buffer Fund 858 769 646 577 488 Contribution Assets 5 945 5 721 5 607 5 465 5 301 Total Assets 6 803 6 490 6 253 6 042 5 789 Pension Liabilities 6 703 6 461 6 244 5 984 5 729 Surplus 100 28 9 58 60 Balance Ratio 1,0149 1,0044 1,0014 1,0097 1,0105

  25. To learn from the Nordic Countries • Broad political support • Tight connection between earnings and benefits • Lifetime earnings • Pensions affected by life expectancy • Flexible retirement

  26. Thank you for your attention For more information • www.forsakringskassan.se • arne.paulsson@forsakringskassan.se

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