Pension Reform in the Nordic Countries: What Can Other EU Member States Learn

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Pension Reform in the Nordic CountriesWhat Can
Other EU Member States Learn?

• The Cicero Foundation
• Paris, 15-16 May 2008
• Mika Vidlund

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Structure of the presentation

• The changing demographics in the Nordic countries
  
• Common features for Nordic pension schemes
• Recent pension reforms
• Concluding remarks

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The change in old-age dependency ratio
(65/15-64) in the EU countries
Source Eurostat 2005
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The change in old-age dependency ratio
(65/15-64) and the situation in 2050
EU-25 average Source Eurostat
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Old-age dependency ratios in Norway and Finland,
1950-2060
Source Statistics Norway Statistics Finland
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Public pension expenditure as a share of GDP
between 2004 and 2050
Source EPC/AWG-calculations (2006)
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Public pension expenditure in the EU-25 countries
in 2004 and in 2050, of GDP
EU-25 average
Source EPC/AWG-calculations 2006
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(No Transcript)
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DK
SE
FI
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• Allianz 2007 Reform Pressure Gauge

FI 13th
SE 11th
DK 9th
NO 8th
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Common features for Nordic Pension Systems

• Universal basic security
• - guarantee pension in FI, SE and NO (in 2010)
• - basic pension model in DK
• Comprehensive earnings-related pension scheme
• - with the exception of DK
• - in DK and IS earnings-related pensions through
  occupational schemes
• - in FI no pension or wage ceiling
• Low income inequality and poverty in old-age
• Prefunding of pensions
• Since the establishment of employment pensions
  FI, SE, DK, IS
• Norway The origin of the Government Pension Fund
  can be traced back to 1990 when the Government
  Petroleum Fund was formally established

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Value of pension assets in the EU countries in
2004, per cent of GDP
Source AWG (2006) EFRP 2005 OECD 2005
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The Government Pension Fund and accrued old age
pension liabilities, per cent of mainland GDP
2005 - 2060
Net interest rate 2 per cent with real annual
growth rate in earnings 2 per cent and real rate
of return 4 per cent Source Norwegian Ministry
of Finance
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Different Designs Recent Pension Reforms

• Countries are similar in many respects, but they
  differ when it comes to their pension design and
  the political making of the pensions
• The Swedish reform in the late 1990s was big
  bang where everything was changed, the Finns
  build on piecemeal reforms that gradually changed
  the whole system, while on the surface, the
  Danish story is about stability and status quo.
  (Three routes to a pension reform (to be
  published by Kangas, O. Lundberg, U. Ploug, N.)

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Different Designs Swedish Pension Reform

• The reform emanated from Parliament, and interest
  organizations were excluded from the planning.
• Path-breaking reform changing the logics of the
  system
• Time schedule
• 1984-1990 Pension Commission
• 1991-1994 Working Group on Pensions
• 1994 New System approved in Parliament
• 1998 Final Legislation approved
• 1999 New system comes into force
• 2003 New system fully implemented
• Transitional rules for those born in 1938-1953
  

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Different Designs Finnish pension reform

• Tripartite Politicians virtually watch the
  process from the sideline
• Gradual and piecemeal reforms - working group
  negotiating to reform pensions. All major trade
  unions and employer federations were represented
  in the group, while there was no political
  representation thus the Finnish procedure has
  been opposite to that pursued in Sweden.
• Towards pension reform 2005
• Kickoff Deep economic crisis in the early 1990s
• - Unemployment rate reached almost 17 per cent
  in 1994 and GDP fell from 1990 to 1993 almost 11
  per cent
• Smaller reforms throughout the 1990s
• - E.g. employees pension contribution
  introduced in 1993.
• Earnings-related pension reform in 1996
• - The calculation base for pensionable wage was
  gradually changed to the ten last years of each
  employment contract (previously 2 out of last 4
  years)
• - Pensions paid to persons aged over 65 were
  revalued by a new index, in which consumer prices
  have a weighting of 80 per cent and wages a
  weighting of 20 per cent (previously 50/50)
• - The national pension was made proportional to
  the earnings-related pension

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Different Designs Finnish pension reform
Pension reform 2005

• Negotiations started at the end of 1990s
• - Pension agreements among the labour market
  parties on 12 November 2001 and 5 September 2002
• - In November 2002, the Government submitted the
  bill to Parliament.
• - Parliament approved a pension reform package
  on 18 February 2003
• Main changes
• - Flexible retirement age between the ages 63-68
• - Linking benefits to life-expectancy from 2010
  onwards
• - Basing benefits on life-time earnings
• - Restricting access to early retirement
• - Increasing the accrual rate within the window
  of retirement
• - Changing indexation rules
• - Redefining and extending accrual for
  non-working periods

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Employment rate of people aged 55 to 64 ( of
population) in the Nordic countries
Source OECD
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• Sweden
• DC-old age pension system 16
  (NDC) 2,5 (DC)
• Flexible retirement age 61 ?
• Automatic pension adjustment Balance ratio
  1.0149 (2006).
• Invalidity pension from sickness insurance
• Compulsory occupational pensions ( 90)
• Administration www.fk.se, www.ppm.nu, www.ap1.se
  (ap 1st 4th, ap6th and ap7th)
• Finland
• No pension or wage ceiling
• ? Occupational pensions are rare
• Pension accrual rates 1.5 (aged 18-52), 1.9
  (aged 53-62) and 4.5 (aged 63-68)
• Flexible retirement age 63-68 (early retirement
  at the age of 62)
• Administration dezentralised (see e.g. www.etk.fi)

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Different Designs Norwegian pension reform 2010

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• Norway
• Current old-age pension scheme
• Retirement age 67
• No statutory early retirement
• Special early retirement pension (AFP) from the
  age of 62
• Occupational pensions compulsory since 2006
• Administration www.nav.no
• Pension reform 2010
• Reform Commission was set up on 30 March 2001
• Governments 1st White Paper on 10 December 2004
  Parliament accepted main principles for a
  reform on 26 May 2005
• 2nd White Paper in October 2006 Parliaments
  agreement on 23 April 2007
• Government bill for consultation on 28 January
  2008

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The main changes to the Norwegian pension system
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Different Designs Denmark and Iceland

• Denmark a lack of income-related statutory
  pensions - the demand for earnings-relatedness
  bifurcated into private occupational and
  individual pension programs. As the generous
  national pension scheme has become increasingly
  income-tested, the occupational schemes are
  eventually becoming the most important part of
  the overall pension design
• Iceland stability - development on pension funds
  and on voluntary savings

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• Denmark
• No earnings-related statutory pension
• SP-scheme 1 of wage (suspension of
  contributions 2004-2008)
• Retirement age 67? 65? 67v...
• Occupational pension coverage over 80
• Administration municipalities (national
  pension) ATP ja SP www.atp.dk
• Iceland
• Earnings-related pension arranged in separate
  funds together with occupational pensions
  benefits may vary
• Retirement age 67
• Administration national pension www.tr.is
  Pension funds www.ll.is (Icelandic Pension Funds
  Association, IPFA).

1.1.2007
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Pension Reform in the Nordic CountriesWhat Can
Other EU Member States Learn?

• Nordic way to financially stable pension system
  technical solutions to meet the changing
  demographics
• - Automatic adjustments e.g. pensions affected
  by life-expectancy
• - Flexible retirement
• - Prefunding
• - etc.
• Incentives for later retirement
• - Tight connection between earnings and benefits
• - Pension policy is not enough
• Hybrid pension plans between DC and DB
• Inclusive pension coverage
• - Easier to renew than pension systems
  representing Continental welfare states - less
  pieces in puzzle
• Broad consensus and political support
• - Piecemeal reforms in Finland vs. path-breaking
  reform in Sweden similar results in the end?
• Nordic cooperation

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Finally, main lesson and a real challenge...
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Thank you for your attention

• For more information
• www.etk.fi
• mika.vidlund_at_etk.fi