The Swedish state provides the national pension and it is administered by the Swedish Pension Agency. It consists of two parts, income pension and premium pension, both of which are based on an individual’s income. Each month the employer pays in 18.5 percent of pensionable income to the state, where 16 percent is paid to the income pension system and 2.5 percent to the premium pension.
The national pension also includes so-called guaranteed pension. It is a basic protection to the persons entitled to a pension, but who have not had an adequate income. The guaranteed pension is financed by the state budget and is independent of the income and premium pension system.
The premium pension - 2.5 percent of the salary - allows the employees themselves to choose directly how it will be invested within the premium pension system. The governmental AP7 manages the premium pension for those who do not make their own active choice. The premium pension is governed by how the equity and fixed income markets develop.
Today, most employable people receive occupational pensions through their employer, often governed by collective agreements. In addition, employees can subscribe, individually, to a private pension.
AP Funds in the pension system
Income pension is a ’distribution system’ where the year’s pension contributions paid by those who work are used to pay pensioners the same year. In return, those who are working receive something called pension entitlements. Current and expected future pension rights earned constitute the system’s pension liability. Everyone’s earned pension entitlements determine the size of the individual income pension received.
The system’s assets consist partly of the so-called contribution assets (86 percent) and partly of the AP Funds’ capital (14 percent). The contribution assets are calculated based on long-term forecasts regarding, among others, the number of employable people and income.
There will be an imbalance in the pension system if many employable people retire at the same time without new workers entering the labor market leading to fewer people employed than pensioners. This would mean pension contributions would not be sufficient to pay-out pensions. The AP Funds, which acts as a buffer to cover these imbalances, compensate for these imbalances that may arise between generations, which is why AP1- AP4 is often referred to as the pension system’s so-called "buffer capital". The buffer capital is used to cover any deficits in pension payments.
AP6 differs from AP1-AP4 in that it is a closed AP Fund where capital is not either paid in or out. AP7 has a very different mission from the other AP Funds in that it manages premium pension capital.
Pension System, net flows
Since 2009, net flows in the income pension system have been negative, in other words payments to current retirees is greater than the contributions paid from today’s wage earners. AP1- AP4 have therefore had annual outflows of capital to the pension system to bridge the generation gap that occurs when the so-called Baby boomers retire.
The Swedish Pension Agency has predicted that AP1-AP4 will need to contribute capital to the pension system during the next 20 years and more to cover future pension payments.
The "Brake" balances pensions
The income pension is designed so that the capital will last over time and follows the income developments in Sweden. If the liabilities of the system should exceed its assets the so-called "brake" will be hit, or balancing - which is the real name. As such, income pensions are lowered when Sweden’s economy slumps and are increased when the economy flourishes.
The increasing value of the AP Funds has contributed to that the automatic balancing mechanism has been avoided for several years. In connection with the financial crisis in 2008 and 2009 the "brake" point was reached. This was a result of severe economic- and employment-downturns and general declines in global equity markets.