Changes to the Swedish retirement pensions encourage employees to stay in the workforce longer
As the lifespan of the Swedish population increases, changes are made to retirement pensions to keep employees in the workforce longer.
The Swedish pension system consists of three parts: a national public pension administered by the State, an occupational pension from an employer, and an individual's savings. Occupational pensions may or may not be part of a Collective Bargaining Agreement (CBA).
- Since 2016, not tax deductible / no advantages
- Normal savings, not connected to “pension”
- Financed and controlled by employer
- If no Collective Agreement, not mandatory to offer pension or risk benefits
- 18.5% of increase up to SEK 49,9000 / month (via social security)
- A “good” pension between SEK 18,000 – SEK 20,000 / month before tax
Pensions in Sweden are tied to two social security-defined amounts
- Income Base Amount (IBA) - increases each year in-line with average earnings. The income base amount for 2024 is SEK 76,200.
- Price Base Amount (PBA) - increases each year in-line with inflation.The price base amount for 2024 is SEK 57,300.
- Individuals with annual incomes over SEK 599,250 in 2023 do not receive a public pension on income above that amount.
The state pension
The State pension is funded by contributions from all Swedes, and any changes are decided by the Parliament. It consists of two components: an income-based pension and a premium pension (PPM), both of which are based on the worker's income. The authority that administers the State Pension is known as “Pensionsmyndigheten”.
There is also a guaranteed pension financed by the State for individuals who have had little or no pensionable income during their lifetime. It is calculated based on residency and the size of the individual’s national income pension.
The income-based pension is the individual’s pension entitlement registered in their own national account.
However, the pension obligations are not financed in advance. Once a year, the individual receives a statement of their account showing the pension level they can expect at different ages. However, those figures are based on assumptions of future salaries. The individual’s pension contributions are used to finance the current pensions of other retirees.
The premium pension is a funded earnings-related old-age pension. The contribution is deposited in an individual investment account chosen by the worker. There is no charge for selecting funds, and the worker can change funds whenever they wish.
Therefore, employees decide for themselves how their funds will be invested within the premium pension. The State Premium Pension Authority administers the premium pension system.
The state pension is paid out for the life of the individual. There are some survivor’s benefits for the spouse and young children, but the amounts are typically low. However, with the Premium Pension, when withdrawing the pension, workers can add benefits for survivors, so the money can stay within their immediate family.
State pension retirement age
In Sweden, the retirement age refers to the minimum age at which workers can take their state pension.
Until recently, the retirement age was flexible, and workers could withdraw all or part of their state pension as early as age 61.
- Raising the minimum retirement age for State Pensions
- Raising the minimum retirement age for Collective Pensions (ITP)*
- Raising the age at which employees are protected against age-based dismissals.
*ITP 1 now has a higher default age for pension and contribution & risk benefits. But in terms of withdrawal, it’s still a minimum 55 years of age. The default age for ITP 2 is still 65.
However, because of the new higher eligibility age for a State pension, individuals now have to wait longer to retire due to physical stress or fatigue or even just to have more time to enjoy life. This highlights the importance of occupational pensions.
Considering the increased life span of the Swedish population, the Parliament voted in 2019 to raise the age at which a worker could retire and start withdrawing their state pension to 62, which could still be considered an early retirement.
The following from Statistics Sweden, shows the increase in life expectancy for both men and women from 2012-2022 (Source: Statistics Sweden). It is believed that the increasing longevity of the Swedes is due to their commitment to maintaining a clean and healthy environment.
Life expectancy in years
|Men at age 65
|Women at age 65
Occupational pensions (ITP)
An ITP plan is a collectively bargained supplemental occupational pension for salaried employees who work for a company with a collective agreement.
Although collective bargaining agreements are predominant in Sweden, they’re not as common with multinationals. What is common though is that even if an employer doesn’t have a collective agreement, they offer a plan that “mirrors” an ITP.
ITP is comprised of two agreements – ITP1 and ITP2. Almost all salaried employees in the private sector are covered by an ITP plan.
ITP1 - A defined contribution retirement pension that covers salaried employees born in or after 1979. The ITP1 contribution rate is paid by the employer and is 4.5% of covered salary up to SEK 46,438 per month plus 30% of salary on the amount between SEK 46,438 – SEK 185,750 per month.
ITP2 – A defined benefit retirement (DB) pension based on final earnings – with some defined contribution components included – for salaried employees born in 1978 or earlier.
With ITP2, the cost for the employer is uncertain. To receive the full DB, a person would need to participate for 30 years, and the earliest age for contributing to an ITP2 is 28. The shorter the participation time, the lower the benefit.
Summary of the changes to ITP
- As of January 1, 2023, the upper age limit for ITP1 has been raised from 65 to 66, which gives employees an additional year to grow their pension.
- The retirement age for ITP2 remains at age 65. Employees who wish to work beyond the age limit can continue to accrue ITP pension benefits but must have an arrangement in place with their employer.
- A cap on earning applies to ITP1(employees born in or after 1979). The cap is a maximum of 30 Income Base Amounts (IBAs) and applies monthly not per year. The IBA increases every year in-line with average earnings.
- ITP2 plans already have a cap on pensionable salary of 30 times the IBA, but it applies annually instead of monthly.
- ITP1 earnings above the limit are not eligible for pension contributions, which impacts employees with very high salaries or who receive a bonus. Many multinationals with “key-employees” consider alternative forms of compensation.
- As of January 1, 2023, the age for an ITP long-term disability pension increased to age 66 for both ITP1 and ITP2 pensions.
- The previous age limit of 65 will apply to illnesses that occurred prior to this date.
- To be eligible, an individual must be over the age of 18 and belong to an ITP occupational pension via their employer.
- The ITP disability pension is calculated based on earnings and complements the pension provided by the State.
Age-related protection against dismissal
As of January 1, 2023, employees are protected against age-based dismissals until they reach age 69 (formerly age 68). If employees want to work beyond age 69, they must obtain their employer’s approval.
IMPORTANT: Beginning in 2026, age-related adjustments in the pension will be made based on changes in life expectancy via a concept known as the “target age” or “riktalder.” The target age will be calculated every year based on life expectancy and will become effective six years later. When a new target age becomes effective, the retirement age will be adjusted to match that age.
Supplemental occupational pensions
Due to the relative decreasing level of the State pension in Sweden, the high tax burden on income and the fact that private pension contributions have not been tax deductible since 2016, the importance of occupational pensions has become even more significant, particularly for those with higher salaries.
Despite existing occupational pension contributions, many employees are still not confident with the level of their forecasted pension.
And while a state pension is payable for a lifetime, with an occupational pension, an individual can withdraw over a shorter period (minimum 5 years), which is useful, if for example, they need a higher pension during the first 10 years.
Salary exchange: increase benefits & reduce tax burden
To strengthen the pension level, many employers, especially multinational corporations, now offer a Salary Exchange Program to their employees in Sweden, regardless of whether an ITP pension is involved. Employees are also showing an increased interest in the possibility of exchanging part of their salary for extra pension contributions. Salary Exchange is a benefit that allows an employee to reduce part of their salary in return for an increased payment to the occupational pension – before income tax is deducted.
More information about Salary Exchange plans is available in the 4Q2022 edition of Network News.