The second-best pension system in the world. That is what we have in the Netherlands, according to the annually published Mercer CFA Institute Global Pension Index, which includes 43 countries. Are other countries doing so poorly? Every two weeks, for twenty weeks, we delve into the system of a specific country. For this episode, we go back to Scandinavia, to the land of vast forests, Ikea and eight months of paternity leave: Sweden.
Sweden ranks 8th in the Mercer rankings and is known as a country with an extensive social safety net. Its pension system is no exception. It starts with the mandatory accrual of a work-related pension through the first pillar (government pension), for employees as well as for the self-employed. Every Swede contributes just under 17.5 percent of their gross income for this purpose. Slightly less than 2.5 percentage points of this goes into a personal pension pot, which gets invested. Upon retirement, this accrued amount is converted into a regular benefit (annuity). The other 15 percentage points are used for a pay-as-you-go scheme. The amount of that pension depends on the premiums you have paid and the annual economic growth until retirement (with which the premiums are indexed). At that point, this “paper” pension pot is converted into lifetime regular benefits. For these benefits, the premiums of the working Swedes are used. The work-related pension is available once they have reached the age of 62.
For residents born after 1938 who have accrued little or no work-related pension, there is also a so-called “guaranteed pension” of 9,765 euros (converted from Swedish Krona) per year (or 21 percent of the average income) in the first pillar. This pension grows in line with inflation and can be taken out once the age of 65 is reached. Also not insignificant: depending on income, a housing allowance of 660 euros per month is available to the retiree in Sweden.
What is remarkable about the Swedish system is the freedom of choice. For example, participants can choose how their personal pension pot (for which they pay the 2.5 percent) is invested, as well as how benefits are paid. The accrued pension rights can be converted into a monthly payment of a fixed amount, with the recipient no longer running any investment risk. Those who do want to run that risk can have their pension money invested and then receive a pension that fluctuates along with the investment returns.
That’s quite a few schemes, and we’ve only mentioned the first pillar. Because about 90 percent of the population also takes part in a supplementary pension scheme of one of the four industry pension funds. The “office worker fund” ITP scheme, for example, for which participants contribute 4.5 percent of their salary from the age of 25 on (over a maximum of 47,400 euros annually). And here too, the participant decides. The premium can be put into a traditional savings plan, but also - somewhat riskier - into investment insurance. Moreover, the participant can choose which insurer will execute the scheme, which asset manager will invest the premium and how long the benefit period will be. The participant is also in the driver’s seat with regard to the survivor’s pension: he or she decides whether a survivor’s pension is accrued, how much and who receives it in the event of death (only partner or partner and children). The only “limitation” is that at least half of the deposit is put into a traditional savings plan.
Many Swedes opt for a limited duration of the (supplementary) pension benefit, for example ten or twenty years. Through the first pillar, someone with an average income already receives 56 percent of that as a pension-for-life. In Sweden you can continue to work past retirement age until you are 68 - with pension accrual (69 as of January 1, 2023). The age at which you can legally retire at the earliest (now 62) will go up to 63 in 2023, however, and by 2026 it will have gone up to 64.
Swedish Joe Average
The Swedish Joe Average receives about 56 percent of his income as a net pension: 24,760 euros. In the Netherlands, this is almost double (48,920 euros), while the price levels of the countries do not differ very much. In terms of “adequacy”, the Swedish system is therefore not in the upper echelons of the Mercer rankings (17th place).
In terms of the sustainability of the system, the Swedes have their affairs in order (6th). In 1999, the system was overhauled and there was a shift from pay-as-you-go to funded financing (where the employee accrues his/her own pension through a pension fund). This makes the Swedish system less vulnerable to ageing.