New scheme enables employees to choose how their pension contributions are invested

As from 1 October 1998, blue-collar workers can decide where to invest their supplementary pension contributions. This is one of the features of an entirely new pension scheme, established through a collective agreement between the LO trade union confederation and the SAF employers' confederation.

The entire Swedish pensions system is about to be reformed. The present state system, dating back to 1957, was a product of its time and was not designed to operate within a context of low economic growth, high inflation and an ageing population which, due to improved health, lives much longer than was the case in the 1950s. The situation in Sweden is similar to other European countries, except that the peak of the ageing population will come earlier in Sweden.

In parallel to the creation of the new state pension system, the Swedish Trade Union Confederation, (Landsorganisationen, LO) and the Swedish Employers' Confederation, (Svenska Arbetsgivareföreningen, SAF), agreed on a new supplementary pension scheme for blue-collar workers in 1996, in the "SAF-LO pension agreement" (Avtalspension SAF-LO).

The previous supplementary pension scheme for blue-collar workers, called the STP (särskild tilläggspension), had been the subject of an agreement between LO and SAF in 1973. In this "pay as you go" scheme, no funds were put aside for the future pension of individuals during the time they active in the labour force. The pension contribution was set each year at a level which would meet all the pensions paid out in that year. Consequently, no specific sum of money was attached to an individual employee. The premium was paid to an insurance company, AMF Pension, established jointly by LO and SAF, on whose board the two organisations had equal representation.

However, as conditions changed, the system became unstable. A smaller number of contributors had to support a larger number of pensioners. In addition, STP benefits were based on the employees' pay level between 55 and 59 years of age, which meant that many employees were adversely affected because an increasing number of workers were unemployed between 55 and 60 and as a result, lost out because they were not able to retire on a pension until they were 65.

The new agreement

According to the new LO-SAF supplementary pension agreement signed in 1996, the employer pays a contribution for every employee from the age of 28 onwards. At present, the employer pays 3.5% of the gross salary, out of which 2% goes directly to pensions and 1.5% to cover costs for conversion to the new system. Employee can choose to retire from the age of 55. It is also possible to take out insurance for surviving relatives.

Another important change is that, as from 1 October 1998, every employee covered by the scheme is able to choose where to invest his or her pension contributions. The AMF Central (initiated by LO and SAF) is administrating the scheme, and will collect and distribute contributions to finance companies chosen by the employees. Some 22 banks and insurance companies are now competing to be involved in the scheme. If employees prefer to allocate their contributions to a managed fund, such as AMF Pension, they may do so. In 1999, all workers in Sweden will have to make a similar choice within the framework of the new statutory pension system.

The new system means that it will be impossible to tell in advance how large a person's pension will be. The charges levied by the insurance companies, interest rates and earnings will all affect the final pension to be paid. In order to maximise their entitlements, employees will now have to be more active than before.

Traditional insurance or unit trusts

There are basically two options for the employee under the new scheme: to allocate pension contributions into an insurance fund; or to invest in equities.

The traditional insurance fund gives a stable rate of return, with a guaranteed minimum rate, which is stipulated by the Financial Supervisory Board (Finansinspektionen). An example is the traditional insurance held by AMF Pension (which is the remaining option for those who do not want to decide where to invest their pension contributions). If employees choose to invest their contributions in the traditional AMF insurance fund, the contributions will be invested in the following proportions: 47% equities, 50% debentures and 3% in property. The minimum rate of return is 3%-4%, but during the last 25 years AMF Pension has had an average rate of 12%.

The other option is to invest pension contributions in other forms of savings. Over a longer period of time, shares have turned out to be a more profitable form of savings, but also carry a greater degree of risk. Employees can now allocate pension contributions into different unit trusts within the same finance company. Once employees have chosen a company, the contributions remain in it. However, some banks offer up to 32 different trusts to choose from and employees can allocate their contributions within different unit trusts held by the same company. The intention is to maximise profits by reallocating contributions between different unit trusts each year.

LO is keen to secure a foothold in the financial markets and has set up its own insurance company, LO-Folksam, which gives LO a means of political influence in the finance sector. It has recommended that blue-collar workers who want to invest their pensions contributions in unit trusts should choose LO-Folksam. LO-Folksam has three main selling points: transparency for customers; there are no shareholders to consider; and profits are assigned directly to contributors to ensure higher pensions. The AMF is also considered by LO to be a fair alternative.

Commentary

The SAF-LO agreement is in line with the reform of the statutory pension system, which will also allow for a greater injection of financial market interests into the pension system. The choice facing blue-collar workers in the supplementary pensions system can be seen as a rehearsal for a similar choice to be made in 1999 in the statutory pension system. As a consequence of the agreement, employees will now receive far more information on pensions and will be much more involved in complex pension issues. (Lena Järpsten, NIWL)