Sweden's white collar industry-wide pension scheme, ITP, is set for a radical overhaul as the last of the 27 unions that make up the collective bargaining agreement that underpins the system agreed the switch over from a defined benefit (DB) to a defined contribution (DC) scheme.
From 1 January 2007, new entrants to the ITP scheme, which covers white collar workers, will change from a DB scheme that provides 65% of final salary integrated with the social security system, to a DC scheme.
Hans Gidhagen, senior pension's advisor for the employers' organisation PTK, that negotiated the deal with the unions, said that the move over to DC was inevitable.
"The unions didn't like the idea, but ITP was a burden on companies and had to be altered. And with a DC system you will always get back the money that you have earned, so in many ways it is a fairer system - and if the capital markets perform well, members could do better."
Negotiations to move over to DC have been taking place for 12 years, with the unions fighting hard to preserve the status quo. But the changing economic climate meant that few, if any, new companies were willing to submit to collective agreements that included DB schemes, leaving the unions, according to Gidhagen, with little choice.
"Collective agreements don't just cover pensions - they also include things such as salaries and working hours. But these agreements are not mandatory and employers refused to make them because of the pension requirements. The unions realised that unless they backed down they would lose members - because if the unions can't make these collective agreements, what is the point of them?"
One organisation that could suffer from this agreement is Alecta, which currently manages the entire EUR40 billion ITP plan - which is expected to take about 40 years to run-off - but will only be one of several providers to its DC substitute.
Indeed a choice of providers was rumoured to be one of the main reasons behind attempts to alter the DB system in the first place; but at the time of going to press, Alecta had not responded to calls on the subject.
The change of distribution system is almost as important as the move from DB to DC, with Bjorn Jarnhall, chief risk officer at Skandia Liv, sure over the long-term that the ITP changeover will have a large impact on the industry.
"The distribution and the pricing systems will be completely different once this is all in place. In 15 years time you will still be walking down the same street - but the street will look completely different."
According to Jarnhall one significant difference the change to DC could make is in the risk appetite for Swedish consumers. "Guarantees will be more interesting to people than they are now - I expect that unit-linked products with some kind of minimum return guarantees will become more popular as a result of this move."
The week on Risk.net, December 2–8, 2017Receive this by email