The Swedish pension reform of 1998, which led to the introduction of the premium pension, was one of the largest and most innovative pension reforms of its time. It is still the subject of pension reform discussions worldwide. The unique feature of the Swedish pension system is that the mandatory state pension system contains both a pay-as-you-go and a capital-funded component with individual investment accounts.

The pension reform led to the introduction of a three-tier system in the public pension, consisting of a notional contribution-based component, i.e. a notional defined contribution scheme, called income pension (Swedish: inkomstpension), a mandatory publicly administered capital-funded component, called a premium pension (Swedish: premiepension), and a subsidiary pension, the guarantee pension (Swedish: garantipension) for people with an inadequate pension insurance record.

The aim of the pension reform was to make the Swedish public pension system more sustainable, especially against the backdrop of demographic change, but also with a view to the Swedish financial crisis of the early 1990s. Since the introduction of the new pension system, which took place over several years around the turn of the millennium, there have been various minor adjustments to the system. The retirement age was last raised in 2020. The earliest age at which an income[1]related pension can be drawn (the retirement age itself can be described as flexible) is now 62. In 2023, the earliest retirement age is to be raised to 63 and in 2026 to 64, after which it will continue to rise in line with increasing life expectancy.

The retirement age for the guarantee pension will be gradually raised from 65 to 67 by 2026. After that, the retirement age for the guarantee pension will also be adjusted in line with life expectancy. Despite various system adjustments, the basic features of the pension system have remained largely unchanged since its introduction. This also applies to the premium pension, although a number of minor structural changes have been made over the past 20 years.

In the premium pension system, 2.5 per cent of the pensionable income is paid into a fund-based pension system. 40 per cent of the contributions are paid by employees and 60 per cent by employers. The individual premium pension policyholder can choose up to five options from a variety of fund offers and thus decide how the money is invested. In addition to the private fund market, there are various state investment options and a default fund for people who do not make any active investment decision.

The individual bears the overall responsibility for the pension; there is no pension guarantee. More than 1,100 billion Swedish kronor (approx. 105.5 billion euros) are now administered within the framework of the premium pension, which represents a quarter of overall assets in the Swedish fund market.

The premium scheme has achieved average returns well above the income index over the past 20 years. Despite these good average returns, there is still an urgent need for reform. Since its introduction around 20 years ago, various system errors and problems have come to light in the premium pension system that have disrupted its functioning and weakened public confidence in the system. Firstly, the behaviour of individual premium pension policyholders is completely different from the one that had been envisaged when the premium pension was introduced. Instead of actively and repeatedly putting together their own investment portfolio, most insured persons began to leave their funds in the state default fund just a few years after the introduction of the premium pension.

This led to considerable problems in the private fund market, as the lack of competition resulted in an increasing number of unfavourable investment options. In addition, individual investors made very unfortunate decisions in the increasingly confusing fund market. However, information and education campaigns aimed at increasing financial literacy among the population are now considered to have failed. The public acceptance of the premium pension has been further weakened by various embezzlement scandals.

Against the backdrop of these developments, the political debate regarding the premium pension has increasingly shifted towards the question of state responsibility in the premium pension system. In order to ensure the proper functioning of the premium pension system and its acceptance by the population, the premium pension system is therefore to be fundamentally reformed over the next few years. This article takes the 20th anniversary of the premium pension as an opportunity for a fundamental review of the current situation. It shows which guiding principles underpinned the premium pension system when it was introduced in 2000, the problems that have arisen since its introduction, how the system has been modified in recent years, and which reform debates are currently underway.

In particular, it shows how the political debates regarding the matter of state responsibility versus individual risk have changed over the last 20 years, and what effects this has already had on the institutional organisation and legal anchoring and is expected to have in the context of the upcoming reforms. The article does not address the question of the extent to which the Swedish premium pension system can serve as a model for the German pension system. This has already been dealt with in detail for the existing system in other publications. Further, it would be too early for an assessment of the reformed system, as there is still no complete political consensus on the future legal and institutional configuration. The article is divided into four sections. Following this introduction, section 2 explains the introduction of the premium pension in 2000 and its historical context. Section 3 traces the challenges that have arisen since its introduction and discusses the most important system adjustments that have been made over the past 20 years. Section 4, in turn, provides a brief overview of the current functioning of the premium pension system, in particular the role of the Pensions Agency and the state AP7 fund, as well as their respective legal bases. The current reform debates are discussed in section 5. The article then ventures an outlook on the long-term significance of the current reform discussions and the future of the premium pension system.

Source of the paper: SSRN