The Swedish pension system
The Swedish pension system consists of three main components – national retirement pension, occupational pension and voluntary pension. The management of the AP funds is part of the national retirement pension.
The pension system can be likened to a pyramid where national retirement pension forms the base, occupational pension forms the center and voluntary private pension forms the top.
National retirement pension
The national retirement pension is made up of three elements, income pension, premium pension and guarantee pension. The income pension and the premium pension are completely autonomous from the national budget. The income pension is financed by employer contributions representing 16% of an employee’s gross annual income and other taxable benefits. Premium pension is financed through an additional contribution from the employer equal to approximately 2.5% of the employee’s gross annual income. The pension is administered by Swedish Social Insurance Agency (SSIA) and the Swedish Pension Agency (Pensionsmyndigheten).
Income pension: The income pension system is of the defined contribution type, meaning that the size of future pension benefits depends on the amount of contributions made and return on the invested capital. The income pension system is also a so-called pay-as-you-go system, which means that the pension contributions paid in every month are used to pay current income pension benefits to those who have already retired.
The premium pension system is also completely autonomous from the national budget. The employees themselves may choose among the PPM funds how and who they want to manage their pension capital. If no active choice is made, the pension capital is managed by the Seventh AP Fund. The size of the pension benefits will depend on the amount of contributions made and the investment returns of the funds in which they are managed.
Guarantee pension provides basic security for those individuals who are entitled to pension but have a low income or none at all. Guarantee pension is financed by the national budget and is thus entirely separate from the income and premium pension systems.
Occupational pension
Occupational pension is the pension coverage provided to employees via their employer, as a component of salary, which is also known as collective agreement pension. Such pension is normally regulated through collective agreements in the workplace but can also be arranged via the employer where no collective agreements exist. A defined benefit plan guarantees a predetermined monthly income upon retirement. In a defined contribution plan, the amount contributed is fixed but final amount of benefit is not.
Voluntary pension
Voluntary pension consists of private pension insurance based on voluntary savings, in addition to the national retirement and occupational pensions. Due to the wide variety of funds available, the amount of future benefit is dependent on when, where and how the savings are made and naturally also on the amount contributed and the timing for payout of benefits.