1. Lessons from the
Great Swedish
Pension Reform
Should we move
towards more funding
and less PAYG?

2. Reform Reasons Financial instability A Unfair redistribution of income
Significant work disinscentives C

3. according to new system
Pension reform process - very long
1990
1991
1994
1998
2001
2003
1994
Parliament
adopts
principles
of the
new
pension plan
1998
Main
legislation
of the
new
pension plan
2001
Legislation
on the
automatic
balance
mechanism
1992
Draft
of a
new pension
plan
1991
Commission
set up
2003 ”first” payments
according to new system
But transition rather quick i international comparison

4. Reform Objectives Financial stability (= Credibility?) A Transparency
Maximize inter-generational fairness C
Basic income security D

5. What Is a Notional Defined Contribution (NDC) Pension System?

6. Four basic design options
Tie between
contribution
and
accrued
pension
credit
0 %
100 %
III IV I II
Pay-
as-
you- go
Defined Contribution
Funded
Theoretical
or formal
risk
distribution
100 % insured
100 % insurer
(= taxpayers)
Defined Benefit
0 %
100%
Degree of funding

7. Reform Strategy Defined Contribution Defined Benefit PAYGO Funded
Premiepension
Funded
Inkomstpension
“NDC”
Contribution 16 %
Contribution 16 %
Defined
Contribution I II D S G
D = Disability pension
S = Survivors pension
G= Guarantee pension
Defined
Benefit
Old pension
scheme
III IV
PAYGO
Funded

8. Pensinable income of insured
Each crown payed during life result in the same amount of pension credit
Pensinable income of insured
SEK
Funded
2,5 %
16 %
Pay-as-you-go

9. Credited contributions
Development of notional account and convertion to an annuity
Life
expectancy (65
=18,5)
Interest rate
1,6% -
The amount on the
notional account, SEK
Age 25 30 35 40 45 50 55 60 65 70 75 80
Net
indexation
Administration
Survivors
bonus
Annuity
divisor
15,7
Interest
with change in
average income
Credited contributions =
Pension

10. Pension as an annuity Pension Age Imputed interest 0,0 % growth 1,6 %85 45 50 55 60 40 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84
Age
Pension
Imputed interest 0,0 %
growth 1,6 %
..interest 1,6 %
growth 2,0 %
..interest 1,6 %
growth 1,6 %
..interest 1,6 %
growth 1,0 %

11. Individual information
Micro level information

12. Why individual information?
The change from a defined-benfit to (two)
defined-contribution systems
Harmonise the expectations of the insured with the economic and demographic realities
Improve the insured’s opportunities for well informed decisions
Create a relevant sense of confidence and trust between the system and the insured
Make clear that:
If life expectancy continues to increase you either will
have to delay your retirement or accept a lower annual pension

13. Premium pension system
Page 1 2
The
development
of the notional
account 3
Pension credit
earned
last year
The
NDC system
&
Premium pension system
Projection
of the future
pension 4
Premium
pension funds 5
The
development
of the funded
account 6
Explanations

14. Page 1 2 3 4 5 6

15. Page 2
1 euro couronnes

16. Continuation ... The projection
Page 1
Continuation ... The projection
If you draw your pension from age:
age 61: With growth 0 %: you receive
SEK per month
per month
With 2 % growth you receive
age 65: With growth 0 %: you receive
SEK 9,374 per month
per month
age 70: With growth 0 %: you receive
SEK 13,270 per month
per month

17. The base : the last value of the virtual and financial accounts.
Page 1
Continuation ...
The elements of the annual individual
projection
The base : the last value of the virtual and financial accounts. A.
The assumption made on the individuals future contributions to retirement: = 16 % + 2,5 % x last income + 0 % & 2 % B.
Annuity divisor : projected life expectancy at 61, 65 and 65 for
each birth-chohort C.
Indexation / return: D.
0 % 3,5 %
2 % %
At age 61 :
7 321
9 374
13 270
14 727
22 368
10 278
At age 65 :
At age 70 :

18. What are the ideas behind this complicated individual projection?
Page 1
Continuation ...
What are the ideas behind this complicated individual projection?
The importance of economic development
(Growth in average income and the return on capital)
The importance
of retirement age,
and life expectancy
development
Age 61:
1.10
Age 65: /-0
1.52
Age 70:
2.39

19. You may receive a pension from more than one source
Page 1
Continuation ...
You may receive a pension from more than one
source
In addition to the national pension, you may also
receive pension benefits from other sources. This may
be an occupational pension from your employer or
perhaps a pension from your own private pension
savings. Such benefits are not described here.

20. Here opinions differ wildly, at least in Sweden
What is a fair pension
system?
Here opinions differ wildly, at least in Sweden

21. Some of many possible, definitions of a fair pension system:
1. Same pension for all
2. Same replacement rate for all
3. Same ratio of expected benefits over
contributions for all
Calculated at what discount rate? Discount with average income growth, always!
Every contribution, for every insured,
has the same expected value

22. Annual income euro Pension X 18.5 % White collar worker
50 000 X
contribution rate
18.5 %
White collar worker
25 000
Blue collar worker 20 25 30 35 40 45 50 55 60 65 70 75
Age of worker

23. Accumulated contributions= pension credits
Euro
Accumulated contributions=
pension credits
Accumulated interest
(indexation) 20 25 30 35 40 45 50 55 60
Age of worker

24. Notional Capital, i.e. accumulated contributions & interest (indexation), euro 20 25 30 35 40 45 50 55 60 64
Age of worker

25. Credited contributions
Remember this image?
Life
expectancy (65
=18,5)
Interest rate
1,6% -
The amount on the
notional account, SEK
Age 25 30 35 40 45 50 55 60 65 70 75 80
Net
indexation
Administration
Survivors
bonus
Annuity
divisor
15,7
Interest
with change in
average income
Credited contributions =
Pension

26. Annual income euro Pension White collar worker Blue collar worker
50 000
White collar worker
25 000
Blue collar worker
Replacement
rate 42 %
Replacement
rate 65 % 20 25 30 35 40 45 50 55 60 65 70 75
Age of worker

27. Fairness, etc Types of Pensionable Income
11%
Sickness
unemployment
parental
benefits, etc.
Disability benefits 4% 2%
Child years
83%
Wages &
incomes of self employed

28. Guarantee pension change the distribution of risks
for those with low or no income-related pension
The guarantee is a basic security financed with general tax revenue
20 000
40 000
60 000
80 000
42 000
Income-related
pension
Guarantee
Earnings-
related
+ guarantee
pension
Earnings-related pension

29. Pension age to neutralize life-span effect on pension Projected
annuity
divisor
Birth cohort
Gender
neutral
life-
expectancy
at age 65
Effect on pension from increased
life-span
...turns 65
, – years 18 y. 6 m.
,4 –4 % months months
,0 –7 % months months
,5 –10 % months months
,9 –12 % months months
,2 –13 % months months
gdasjdghasdjj

30. Projected Compensation Rate at age 65, Cohorts 1938-1990
Average pension at 65 relative to average wage for those working at that time
Procent 10 20 30 40 50 60 70
Garantipension
Life-span effect
Inkomstpension
Premiepension
Old Scheme
gdasjdghasdjj
Birth Cohort

31. Without balance mechanism
Simulations of net contribution
in percent of total contributions
90’s
Born in
the 1940’s
60’s
Without balance mechanism

32. Without balance mechanism
Simulations of fund ratio,
Market value of buffer fund
One year of pension disbursements
Without balance mechanism

33. Four stylised policy makers – which one are you?
The
publics
perception of
the policy
makers
knowledge of
the
future 1
Trusted
true
prophet
Mistrusted
Accountant
false
Line of
satisfied expectations
Policy
makers
knowledge
of the
future 1

34. Distributed by: Riksförsäkringsverket (RFV), Stockholm
The end