More information about the pension system
The Swedish pension system is made up of lots of elements that contribute to its robustness in a variety of ways.
Första AP-fonden is a stakeholder that contributes to the robustness of the Swedish pension system. This scheme may appear to be complex, but it works well and helps to maintain a high quality of life for current and future pensioners.
The pension system in Sweden is based on 18.5 per cent of the workforce’s pensionable income being set aside each year, with 16 per cent going to the income pension and 2.5 per cent to the premium pension. The income pension is used to pay pensions to current pensioners, while the premium pension is invested in funds that people can select themselves.
Every year of employment with a pensionable income adds to the future national pension. Income such as parental allowance, studies and unemployment benefit also provide entitlement to a pension.
A person’s future pension is based on their lifetime income; the longer they work and the higher their income, the bigger their pension will be. This also means that breaks in employment, such as leave of absence, part-time work or working without paying taxes, may result in a lower pension.
Any surplus pension system contributions are transferred to the AP Funds, which are also known as buffer funds. If contributions are insufficient to cover disbursements, the difference comes out of these funds. The AP Funds provide a safeguard for the long-term sustainability of the pension system, offsetting imbalances that may arise due to demographic changes, such as an ageing population. Effective management means that the funds help to ensure that the system remains stable, even when contributions are lower than disbursements.
The Swedish pension system is robust. Technically, it cannot go into arrears over time, as it is designed with a brake to prevent assets falling below liabilities.
The returns from the AP Funds have helped to avoid activation of the automatic balancing mechanism, the “brake”, which slows pension growth when liabilities exceed assets. This mechanism was activated most recently following the financial crisis in 2009, but the risk is limited nowadays as the capital in the First to Fourth AP Funds exceeds liabilities.
Första AP-fonden manages part of the buffer capital, together with the Second, Third and Fourth AP Funds. These funds account for some 16 per cent of total pension system assets. Första AP-fonden manages 3 to 4 per cent of the pension capital and maintains a long-term approach in order to generate high returns with low risk.
Besides the state pension, most Swedes also have an occupational pension paid by their employer. This occupational pension is usually determined by means of collective agreements, but, according to the Swedish Pensions Agency, it can provide a total pension equivalent to 60 to 75 per cent of the individual’s previous income, together with the income pension. The guarantee pension and other state support is available to people on lower incomes and provides a basic level of security for all. The income pension supplement was introduced in September 2021, which is also a form of state support for people who have worked but nonetheless have a small pension.
Sweden’s national pension system is designed to be stable and reliable. The AP Funds play an important part in balancing and helping to ensure that all generations are treated equally.
Each year, 18.5 per cent of pensionable income, i.e. salary and other taxable benefits up to 7.5 income base amounts after deduction of the general pension contribution, is allocated for national pension fees.
People in employment receive pension rights determined by the contributions they make.
16.0 per cent goes to the income pension, and the remaining 2.5 per cent goes to the premium pension and is invested in funds, either in the Seventh AP Fund or with private fund companies.
The contributions paid into the income pension are used to pay pensions to pensioners that same year.
If more income pension is received in a year than is needed for that year’s pensioners, the surplus is transferred to the First to Fourth AP Funds, which act as the buffer funds for the pension system.
The difference comes out of the capital of the four buffer funds if the year’s contributions are not sufficient to pay pensions.
The purpose of the buffer funds, the First and Fourth AP Funds, is thus to make the pension system more stable and to bridge short-term imbalances over time, primarily due to the demographic composition of pensioners and people in gainful employment.