A number that reflects the average remaining life expectancy at retirement, discounted by an “interest” rate of 1.6 %. In the calculation of the annual inkomstpension benefit, which is made at the time when this pension is first withdrawn, the individual’s pension balance is divided by the annuitization divisor. Because of the interest credited at 1.6 %, the annuitization divisor at the time of retirement is always less than the remaining average life span.
A method of indexing the pension liability to ensure that the disbursements of the inkomstpension system will not exceed its revenue in the long run. If balancing is activated, the pension liability increases at a compounding rate approximately equal to the system’s internal rate of return.
Here, income as measured by the income index.
The assets of the pay-as-you-go system – i.e. the contribution asset and the buffer fund, divided by the pension liability of the system. The balance ratio can be considered equivalent to the consolidation ratio of a funded system. Unlike the consolidation ratio, however, the balance ratio provides no information on the amount of funded assets in relation to the pension liability.
Absorbs interperiod discrepancies between pension contributions and pension expenditure in a pay-as-you-go system. The primary purpose of a buffer fund is to stabilize pension levels and/or pension contributions against economic and demographic fluctuations.
of Sweden’s national pension system comprises the First, Second, Third, Fourth and Sixth National Pension Funds. Legally and administratively, the buffer fund of the pay-as-you-go system thus consists of five different funds. Pension contributions are apportioned equally to the First-Fourth National Pension Funds, which also contribute equally to the payment of pensions. A reason for dividing the pension capital among four initially identically large funds, with an identical mission and identical regulations is to limit the concentration of power that otherwise would have resulted. Another reason is that such a division might increase risk diversification and competitiveness in fund management. The much smaller Sixth National Pension Fund receives no pension contributions and pays no pensions and it can be considered a kind of anomaly within the new pension system inherited from the old system. From the standpoint of the pay-as-you-go system, the five buffer funds may be viewed in some respects as a single fund. Information on the buffer funds is available on: their respective websites at: http://www.ap1.se, http://www.ap2.se, http://www.ap3.se and http://www.ap4.se.
Defined-benefit pension systems
Pension systems in which the insurer bears the financial risk of possible variations over time in mortality and the rate of return on the assets of the system. In a public pension system, the insurer is the taxpayer, which means that the contribution to the system may vary.
Defined-contribution pension systems
Pension systems in which the insured bears the financial risk of possible variations over time in mortality and the rate of return on the assets of the system. Consequently, the value of pensions may fluctuate. A supplementary definition is that in a defined-contribution pension system pension credit accrues by the same nominal amount as the contributions paid by or for the individual. In principle, pension credit accrues at the time when a contribution is paid into the system.
Beginning in 1999, the incomes in the income index (U) consist of pension-qualifying income (incl. income in excess of the ceiling on pension-qualifying income and income in the form of sickness and activity allowances), less the national pension contribution, earned by persons aged 16-64. The sum of these incomes is divided by the number of persons who have earned them. If the income index for year t is designated I (t), then I (t)
Ut−1 = forecast of the average income for year t−1
Ut−4 = settled average income for year t−4
CPIt−1, CPIt−2, CPIt−4 = consumer price index for June in years t−1, t−2, and t−4
k1 = correction factor for subsequent (more exact) forecast of income in year t−2
k2 = correction factor for difference between actual and forecast income in year t−3.
To reduce the volatility of the index, a three-year moving average is used. To counter the slow compensation for changes in inflation rate that this smoothing otherwise would cause, the inflation rateduring the three-year period is derived from the change in nominal average wages, and the change in the CPI in the last year is subsequently added.
Here, the term indexation is used both for the annual “interest” accrued on the notional pension balances (pension accounts) and for the annual revaluation of the pension benefit. The indexation of the pension balances is based on the income index or, if the balance mechanism is triggered, by the balance index. The revaluation of the pension is based on the change in these indices divided by 1 016, a reduction for the interest rate that is credited in the calculation of the annuitization divisor.
The unused pension balances or premium-pension capital of deceased persons, shared by all insured survivors. Inheritance gains are allocated as a percentage increase in the pension balances or premium-pension capital of all insured survivors in each birth cohort. At age 65, inheritance gains are estimated at about 8 per cent of the pension balances and premium-pension capital.
Internal rate of return
Here, the compounding rate of the pension liability so that it increases at the same rate as the assets of the system. The internal rate of return is determined by the change in the contribution revenue of the system and the change in the extent to which these contributions can finance the pension liability – in other words, the change in turnover duration – and the return on the buffer fund, in addition to the cost (gain) due to changes in average life span. If balancing is activated, the pension liability is compounded at a rate approximately equal to the internal rate of return of the pay-as-you-go system.
Pay-as-you-go pension systems
Pension systems in which the pension liability need not be backed by a certain amount of funded assets. A pay-as-you-go system is often described as a system where contribution revenue is used directly to finance pension disbursements. This description is inaccurate in the case of a pay-as-you-go system with a buffer fund.
The sum of the annually determined pension credit, which is successively recalculated in accordance with the income index, – or alternatively the balance index, – inheritance gains and costs of administration.
An individual’s pension credit is 18.5 per cent of his/her pension base and is equal to the pension contribution. Accrual of pension credit increases the individual’s pension balance and premium-pension capital.
Pension level Here, the average pension in relation to the average pension-qualifying income.
In this report, the financial commitment of the pension system at the end of each year. The pension liability to economically active persons is the sum of the pension balances of all these individuals. The liability is calculated by multiplying the amount of the pension of each birth cohort by the average remaining (economic) life expectancy of that cohort. Through 2017, a pension liability will also be calculated for the ATP credit earned by the economically active.
A basis for granting pension credit apart from taxable income or any actual earned income. Pension-qualifying amounts, or imputed pension-qualifying income, can be credited for sickness and activity allowances, childcare years, study, and compulsory national service.
The income used in calculating the pension credit of the insured. In principle, it consists of annual earnings reduced by the general individual pension contribution. Before deduction for this contribution, the maximum pension-qualifying income is 8.07 income-related base amounts; after this deduction, the maximum pension-qualifying income is 7.5 income-related base amounts.