1. Pension Reform in the Nordic Countries: What Can Other EU Member States Learn? The Cicero Foundation Paris, 15-16 May 2008 Mika Vidlund

2. Structure of the presentation The changing demographics in the Nordic countries Common features for Nordic pension schemes Recent pension reforms Concluding remarks

3. Source: Eurostat 2005 The change in old-age dependency ratio (65+/15-64) in the EU countries

4. The change in old-age dependency ratio (65+/15-64) and the situation in 2050 EU-25 average Source: Eurostat

5. Old-age dependency ratios in Norway and Finland, 1950-2060 Source: Statistics Norway; Statistics Finland

6. Public pension expenditure as a share of GDP between 2004 and 2050 Source: EPC/AWG-calculations (2006)

7. Public pension expenditure in the EU-25 countries in 2004 and in 2050, % of GDP Source: EPC/AWG-calculations 2006 EU-25 average

9. FI SE DK

10. Allianz 2007: Reform Pressure Gauge FI = 13th SE = 11th DK = 9th NO = 8th

11. 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

12. Value of pension assets in the EU countries in 2004, per cent of GDP Source: AWG (2006); EFRP 2005; OECD 2005

13. 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

14. 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.)

15. 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: - 1984-1990Pension Commission - 1991-1994Working Group on Pensions - 1994 New System approved in Parliament - 1998Final Legislation approved - 1999New system comes into force - 2003New system fully implemented Transitional rules for those born in 1938-1953

16. 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

17. 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

18. Employment rate of people aged 55 to 64 (% of population) in the Nordic countries Source: OECD

19. 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) www.fk.se www.ppm.nuwww.ap1.se 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)www.etk.fi

20. Different Designs – Norwegian pension reform 2010

21. 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.nowww.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

22. The main changes to the Norwegian pension system

23. 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

24. 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 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). www.tr.is www.ll.is 1.1.2007

25. Pension Reform in the Nordic Countries: What 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 - Close contacts between the Nordic countries in most areas of society - Nordic cooperation is firmly rooted in cultural and societal ties, shared democratic traditions, values and way of life. Comparable to the Open Method of Coordination in EU?

26. Finally, main lesson and a real challenge...

27. Thank you for your attention For more information: www.etk.fi mika.vidlund@etk.fi