Direct Request (CEACR) - adopted 2004, published 93rd ILC session (2005)

Invalidity, Old-Age and Survivors' Benefits Convention, 1967 (No. 128) - Sweden (Ratification: 1968)

The Committee notes that the Government’s report has not been received. It hopes that a report will be supplied for examination by the Committee at its next session and that it will contain full information on the matters raised in its previous direct request, which read as follows:

The Committee notes the information provided by the Government in its report, as well as its reply to the Committee’s previous comments. It has also taken into account the information contained in the annual reports on the application of the European Code of Social Security by Sweden.

1. Pension reform. The Committee notes the important changes brought to the old-age, invalidity and survivors’ benefits by the pension reform adopted by the Parliament in 1998, which has introduced such new concepts as basing pensions on lifelong earnings, including income from employment, business activities and social security benefits; crediting of amounts for periods of child care, national service and disability for which pension contributions are paid in full by the State or the relevant social insurance scheme; flexible retirement age with no upper age limit; indexation of pensions to real income growth; guaranteed state pensions for those who have not earned pensions considered to be sufficient; calculating actual pension with regard to the remaining life expectancy of the person concerned; possibility for the capital accumulated in individual savings accounts to be claimed in the form of a pre-funded pension or used for investment in security funds; transferability of pre-funded pension rights between married or registered partners, etc. The new pension system includes three components: (1) PAYG public pension scheme providing income-related pensions, which have replaced a former national supplementary pension (ATP); (2) premium reserve funds providing a pre-funded pension financed from the savings on individual pension accounts; and (3) a guaranteed pension provided from the state budget as basic security for low income earners, which has replaced the former basic pension (FP). Out of the total pension contributions representing 18.5 per cent of the individual’s lifetime income, 16 per cent is used to finance pension payments under the PAYG scheme in the same year, while 2.5 per cent is saved and earns interest in an individual premium reserve account. While the old supplementary pension system was a typical defined benefit system, the reformed PAYG scheme and the premium reserve scheme are defined contribution schemes. The reformed old-age pensions system, which came into force on 1 January 1999, is being introduced gradually over an extended transitional period. Those born in 1937 and earlier will receive their ATP pension entirely according to old rules. Those born between 1938 and 1953 will have part of their pension calculated according to the rules of the old system and part according to the new rules, subject to a special guarantee rule that they will be entitled to at least the pension they have earned under the old rules up to the adoption of the pension reform by Parliament in 1994. Those born in 1954 or later will receive pensions entirely according to the new rules. The first payment under the reformed old-age pension system took place in January 2001.

The reform of the old age-pension was followed by changes in other social security branches. The new legislation on survivors’ pensions and support for children adopted in 2000 will enter into force from 1 January 2003, together with other laws related to the pension reform in Sweden. Under this legislation, the text of which has been supplied by the Government, the special survivors’ pension will be abolished, while the adjustment pension will be paid to a surviving spouse who at the time of the death of the other spouse lived together with a child under 18 years of age, instead of 12 years as before. In the spring of 2001, the Government put forward proposals designed to bring existing disability pensions into line with the new old-age pension system and the new rules are expected to enter into force from January 2003. A further government proposal to reform work injury insurance was to be presented in the autumn of 2001. Furthermore, a new Social Insurance Act, the text of which has been also supplied by the Government, entered into force on 1 January 2001 and divided the social security system (except unemployment insurance) into two parts: a residence-based insurance scheme providing guaranteed amounts and benefits and a work-related insurance scheme against loss of income. The dividing line corresponds largely to the difference between contributory and non-contributory benefits schemes. Both categories of benefits apply equally to all persons regardless of nationality who are habitually resident or work in Sweden. Work-related benefits are no longer related to residence in Sweden and the Act contains provisions on work, studies or stays abroad.

The Committee takes due note of this information. It notes that the reform measures have been accompanied by changes in the nature and methods of calculation of certain benefits. Taking into account that many of the new provisions concerning long-term benefits have not yet entered into force, the Committee would like the Government to continue to supply information on the reform process and to present a detailed report on the state of its legislation and practice in the invalidity, old-age and survivors’ benefit branches in 2004. Please also explain the new methods of the calculation of benefits and provide the necessary statistics in the manner requested by the report form on the Convention, together with an English translation of the new legislation, if available.

2. New mechanism for the revision of benefits. Article 29 of the Convention in relation to Parts III (Old-age benefit) and IV (Survivors’ benefit). According to the final report on "The pension reform in Sweden", June 1998, the old benefit formula for calculating pensions demanded an economic growth of approximately 2 per cent annually; with slower growth increased contributions to the system were necessary. While during the 1960s GDP increased by over 3.7 per cent per year, since 1975 average annual growth has been less than 2 per cent. Furthermore, the fluctuations in the business cycle have been increasingly large. The low rate of growth in the past two decades combined with growing instability and an increasing number of pensioners receiving higher pensions has exposed the weakness of the system and the need to reform it. Consequently, the mechanism of the adjustment of pensions has been changed. In the old system, to ensure that pensions did not depreciate as a result of inflation, both earned pension rights and pension payments were adjusted to price trends on the basis of changes in the consumer price index. This was done automatically by indexing the base amount used for the calculation of pensions. However, such indexation of pensions, which maintained their purchasing power in conditions of the decline or very small increase in real earnings in the country, has sharply increased the cost of the pension system for the working population. In the new pension system designed for conditions of low growth, contributions to the PAYG scheme as well as the payouts from that scheme were linked directly to economic growth. In place of price trends the value of pensions shall now follow the development of average income for the working population, so that the costs of the pension system will be automatically adjusted to the overall resources of the national economy. This is done by adjusting the base amount not to changes in the consumer price index but to changes in the new economic adjustment index, which reflects average income growth in the economy.

Thus, as regards the PAYG scheme, if real average income increases, the value of the income-related pension rights will also increase. If real earnings fall, the value of the rights will also decrease; in fact, it may be lower in terms of purchasing power than at the time of payment of the contribution. When the new pension is computed, the pensioner will be credited with an assumed future growth in real wages; the adjustment of the pension will be done subsequently on the basis of how actual growth compares with the assumed growth for this year. At present, indexation of pension payments is based on a notional future growth rate of 1.6 per cent, which is called the "norm". If real growth is equal to the norm, pensions will be adjusted upwards by a percentage equal to that of inflation. If real growth is higher than the norm, pensions will be adjusted upwards by the rise in prices plus the rate of real growth in excess of 1.6 per cent, which will give pensioners not only full compensation for inflation but also a share of the growth in real wages enjoyed by the economically active. However, if real growth is lower than the norm, full compensation will not be made for price increases and inflation, which means that pensions will fall in real terms.

According to the Government, the new adjustment mechanism relates only to old-age pensions and, from 2004, to survivors’ benefits, and that other benefits that were part of the former pension system, such as injury and invalidity benefits, have been separated from the new pension system. These benefits are still recalculated every year in accordance with changes in consumer prices. Furthermore, in the new pension scheme there is a guaranteed pension, which is designed to secure a minimum standard of living for pensioners and is also recalculated every year in accordance with changes in consumer prices. The existence of the guaranteed pension protects not only those with low lifetime incomes in respect of the level of their pensions, it also protects those with the lowest pensions from any decline in the real value of their pensions due to a growth in real wages of less than 1.6 per cent. On the other hand, these individuals will not benefit from any real growth in average wages of over 1.6 per cent. The guaranteed pension is calculated on the basis of the price-related base amount, which is adjusted every year in line with changes in consumer prices. It is reduced to zero for persons receiving a public earnings-related pension worth 3.07 price-related base amounts per year, who are therefore the only category of pensioners fully exposed to the risks of a slower growth in real average wages than 1.6 per cent per year. According to the Government, it is inevitable that pensioners in normal/higher income brackets are exposed to the risk of slow economic growth in view of the size of the earnings-related pension liability, which amounts to 250.6 per cent of GDP. A liability of this order cannot be guaranteed by public funds and the Government/taxpayers cannot guarantee the purchasing power of all earnings-related pensions irrespective of the rate of economic growth in Sweden. The Government considers that the above system represents a good balance between social and financial concerns, which automatically directs more resources to maintaining the purchasing power of low-income pensioners when growth is slack.

The Committee notes this information. It appears from the above explanations that, in difference with the old pension system, which was established in a rapidly and stably growing economy, the new pension system in Sweden is designed to function in conditions of low and unstable economic growth and to absorb the frequent fluctuations in the business cycle, subject to inflation being kept under control. This is achieved by replacing the defined benefit system with the defined contribution system, which permits to contain pension costs by turning the real value of pension assets from a "constant" into a "variable" depending upon the overall economic performance. Changing the adjustment principle from indexation to prices to indexation to real economic growth appears to be the logical consequence of this reform. The new mechanism for the revision of benefits however concerns only one of the three components of the reformed pension system, namely income-related pensions provided by the PAYG scheme. In the premium reserve scheme there is no need to index the pension capital because the interest is straightforward and consists of the yield from investments, while the new guarantee pension, in the same way as the basic pension before it, continues to be pegged to changes in consumer prices, thereby maintaining the purchasing power of pensioners of small means. To better appraise the design of the new pension system, the Committee would like the Government to provide statistics on the number of persons receiving the guaranteed pension in relation to the total number of old-age pensioners in Sweden.

As regards the new adjustment mechanism for income-related pensions, the Committee observes that, where the rate of economic growth in the country over the previous year does not reach the established norm (currently 1.6 per cent), pensions are adjusted downwards, decreasing their real purchasing power at the moment when it particularly needs to be safeguarded. It further notes that during the transitional period until 2030, this "norm" in economic adjustment indexing will be financially important, as the index will also apply to pensions calculated according to the old rules and will directly affect their value. In view of the fact that establishing a relatively high "norm" of economic growth would mean a relatively high risk of successive decreases in the real value of the pension, the Committee would like the Government to explain how this "norm" is determined in order to ensure the most realistic assumption of future economic growth.

Finally, as regards the consequences of the new adjustment mechanism, the Committee notes that, as stated in the final report on "The pension reform in Sweden", "when times are bad, pensioners bear their share of the burden. In good times, they benefit from the rise in living standards" (page 14). The Committee wishes to recall in this respect that the aim of the mechanism of the adjustment of benefits established by Article 29 of the Convention consists both in maintaining the purchasing power of benefits "when times are bad" by adjusting pensions to substantial changes in the cost of living, and raising the standard of living of pensioners "in good times" by adjusting pensions to substantial changes in the general level of earnings. With this in mind, the Committee would like the Government to explain in its next report the manner in which current periodical payments in respect of old age and death of a breadwinner were reviewed and to provide detailed statistics required by the report form under Article 29, for the same time period, based not only on the new economic adjustment index, but also on the traditional cost-of-living indices reflecting changes in consumer prices. As regards old-age benefit, please give data separately for the income-related pension and the guaranteed pension.

[The Government is requested to report in detail in 2005.]