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5 November, 2021

Holland and Sweden among the best pension systems in the world

The presentations by the Chairman of PensionsEurope, Janwillem Bouma, and the Product Manager of the Swedish pension fund Alecta, Fredrik Palm, diagnosed the pension systems of their countries, Holland and Sweden, respectively, which rank as some of the best pension systems in the world.

According to the latest “Global Pension Index” report by Mercer and the CFA Institute, the Netherlands and Sweden are among the countries with the best pension systems in the world (ranked number 2nd and 8th, respectively). The experience of these countries is critical to revealing how their pension systems function, and how to apply such experiences to other countries that need to improve their pension systems.

The system in place in Sweden, is mixed, i.e., it combines elements of PAYGO and individually funded systems. One of the most characteristic attributes of the Swedish system is its PAYGO system based on notional accounts. In this system, workers have fictitious accounts in which the contributions they make are recorded. Workers are informed of their account balances annually, and their pensions are calculated directly from the accumulated balances in their accounts when they retire.

The pension system comprises three pillars: the state pension, the occupational pension, and voluntary private savings.

The state pension is the so-called “Garantipension” (guaranteed minimum pension) for people over 65, which is non-contributory and intended for workers who have not contributed enough, or who can only access a pension below a certain minimal amount. It is financed via general taxes.

The occupational pension is divided into two levels:

  1. Inkonstpension: Financed by employers’ and workers’ contributions (16% of salary). It is a PAYGO system based on the aforementioned notional accounts. Contributions finance pensions, and those in the individual account are revalued annually, based on average wage growth, with an automatic adjustment mechanism. The revaluation is limited if the system’s assets are deemed to be less than its liabilities, in order to safeguard its stability.
  2. Pre-pension: This is also financed by employers’ and workers’ contributions (2.5% of salary). It is an individually funded system in which workers can contribute to different pension funds managed by private entities (the default state alternative is AP7 Såfa).

The Dutch system, on the other hand, ranked second after Iceland, also comprises three pillars. The first pillar is public, subject to legal residence in the country, as well as the marital status of individuals. Occupational pensions managed by pension funds and insurance companies comprise the second pillar. They are mandatory in employment contracts. Finally, the third pillar comprises private, voluntary pension plans, managed by insurance companies.

An important reform, scheduled for implementation in early 2027, is underway. It consists in eliminating defined benefit instruments from the occupational system, gradually transferring them to a new defined contribution contract and individual accounts. This modernization will be carried out due to the demographic and labor changes evidenced in many countries: increase in life expectancy, reduction in the number of young taxpayers, labor informality, lower interest rates (which have increased the present value of future pension obligations), and reduced confidence in the system, among others.

“Among the challenges we face is the modernization of the occupational pillar contracts and better adjustment to a more flexible labor market. The transition to the new system is complicated, because if transfers are not done properly, they can cause enormous financial disadvantages to people who have been contributing for 10 or 20 years,” explained Janwillem Bouma.

The presentation can be viewed on the seminar’s website (https://seminariofiap.strim.cl/).



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