3.

Accounting Principles

The Annual Report of the Pension System has been prepared in accordance with Chapter 55 § 4 of the Social Insurance Code (2010:110) on the Earnings Related Old Age Pension (SFB) and Regulation (2002:135) Annual Reporting of the Financial Position and Development of the Old-Age Pension System.

The income-related old-age pension system includes the benefits provided by the inkomstpension, the ATP and the premium pension.¹ The inkomstpension and the ATP are examples of benefits in a pay-as-you-go pension system. In such systems, contributions are not funded, but in principle are used directly to finance pension disbursements. The National Pension Funds are buffer funds that absorb differences between the inflow of contributions and the outflow of pensions. As elsewhere in the accounts, the term “inkomstpension” is used here in reference to the entire pay-as you-go system; in other words, it often applies to the ATP as well. According to Chapter 58 § 14 SFB, the reported assets of the pay-as-you-go system consist of the contribution asset and the value of the assets of the First–Fourth and Sixth National Pension Funds. Formulas for calculating the contribution asset and the pension liability of the inkomstpension system are provided in the Regulations for Calculation of the Balance Ratio (2002:780). These formulas are also found in Appendix B.

In this year’s report, the Pensions Agency has revised a formula to bring it in line with the increase in the minimum withdrawal age from 61 to 62. This revision concerns the variable \(he\), change of pension disbursements due to death, which is calculated on the basis of pension disbursements per birth year. With the increase in the pension withdrawal age, there will be no pensioners age 61 at the end of 2020, and the Pensions Agency therefore considers that \(he\) be set at 1 for the age group, which means that the variable \(L^*\), proportion of remaining disbursements, is set to 1 for age 61 in the same way that it was set to 1 for age 60 in previous years.

The premium pension system is a fully funded pension system where contributions are invested and the proceeds of selling accumulated capital are used to pay pensions.

According to the Regulations for the Annual Report (2002:135), the Orange Report is to include a projection of the assumed long-term development of the pension system. See chapter 7 Three Scenarios for the Future of the Pension System.

The accounting principles of the National Pension Funds are set forth in their annual reports and are therefore not described in this report. The annual report of each national pension fund is available on the home page of the respective fund: www.ap1.se, www.ap2.se, www.ap3.se, www.ap4.se and www.ap6.se. As the annual report of the Swedish Pensions Agency describes the accounting principles used for the premium pension, these are only presented in summary form in this report.

The accounting for the inkomstpension system is based on data from the records of the Swedish Pensions Agency on pension credit earned and pension disbursements, respectively.

In the Annual Report of the Swedish Pension System, information on the operations of the First–Fourth and Sixth National Pension Funds has been taken primarily from the annual reports of the respective funds.² The buffer funds prepare their annual reports according to the Law on National Pension Funds (2000:192). Furthermore, on the basis of applicable provisions for comparable financial companies, the funds have developed common principles for accounting and valuation.

In the Annual Report of the Swedish Pension System, information on the premium pension has been taken from the annual report of the Swedish Pensions Agency, which was prepared as provided in Regulation (2000:605) on Annual Reports and Supporting Documentation for Budgeting. Invested assets (and the corresponding liabilities) of the premium pension system have been valued according to the provisions of the Law (1995:1560) on Annual Reports of Insurance Companies and according to the regulations and general guidelines of the Swedish Financial Supervisory Authority for Annual Reports of Insurance Companies. The assets and liabilities of the premium pension systems are included in the consolidated balance sheet of the Swedish Pensions Agency, and the operations of the premium pension system are reported in a separate section of the income statement. Certain revisions, simplifications and consolidations have been made to facilitate comparison between the presentation and that of the inkomstpension.

Assets and liabilities included in the temporary management of pension contributions are reported in the annual report of the Swedish pension system as an insurance asset and pension liability. This is a deviation compared to the Swedish Pensions Agency annual report.

The assets and liabilities are valued mainly on the basis of events and transactions that are verifiable at the time of valuation. For example, the fact that contribution revenue normally changes at the rate of economic growth is not considered in the calculation of the contribution asset. Nor is consideration given in the valuation of the pension liability to the fact that pension disbursements, through indexation and other factors, will change in the future.

Through the design of the inkomstpension, there is a strong link between the development of the system’s assets and liabilities, respectively. When balancing is activated, there is basically an absolute link between the respective rates of change in liabilities and in assets.³

The way in which the assets and liabilities of the inkomstpension system are valued is based on the assumption that these will change at the same rate after each valuation. To put it another way, the method of valuation is based on the assumption that the system’s future internal rate of return will be the same as the future change in the value of the pension liability, even though this is certain only if balancing is activated. When balancing is not activated, the internal rate of return may be either greater or less than the change in the value of the pension liability.

The valuation of the contribution flow and the pension liability is based almost exclusively on conditions prevailing at the time of valuation. This is not due to any belief that all these factors will remain totally constant. Rather, the accounting is designed not to include changed conditions until the changes are reflected in the events and transactions on which the accounting is based.

The basis for valuation of the contribution asset is the size of the pension liability that the contribution revenue for the accounting year – i.e. paid-in pension contributions – could finance if the conditions prevailing at the time of valuation remained constant. The relevant determinants here, in addition to the rules of the pension system, are economic and demographic. The economic conditions consist of the average pension-qualifying income of each annual birth cohort and the sum of these incomes. The demographic factors relate to mortality at different ages. The relevant rules for the pension system are those that govern the calculation and the indexation of the inkomstpension, define the contribution and pension base and determine the contribution in percent. The contribution asset is calculated by multiplying the financial year’s contribution revenue by the previous year’s turnover duration.⁴ Turnover duration expresses how long it takes, on average, from the payment of SEK 1 in revenue into the system to the disbursement of a pension based on the pension credit arising at the time the pension credit was earned. Thus, turnover duration reflects the age difference between the average pension contributor and the average pensioner that would result if the economic, demographic and legal conditions were constant. If turnover duration increases it means the value of contribution flow increases and vice versa.

The assets of the National Pension Funds are valued at their so-called true value. This means that the assets are valued preferably at their latest price paid on the final trading day of the year, otherwise at their latest price bid.

The liability of the inkomstpension to persons who have not begun to draw an old-age pension is valued as the sum of the pension balances of all insured persons. Income earned in the year covered by the accounts has not yet been confirmed at the time of the report. For this reason, an estimate of the inkomstpension credit earned in the year of the report is added to the sum of the pension balances of the insured. This added amount equals about three percent of the total pension liability. The difference between estimated and confirmed pension credit is deducted in the accounts for the following year.⁵

The pension liability to retirees is calculated by multiplying the pensions granted (annual amount) by the expected number of years for which the amount will be disbursed. The number of years is discounted in order to reflect the indexation of disbursed amounts by the increase in the income index or balance index with a reduction of 1.6 percentage points.⁶

The expected number of pay-out years is calculated from measurements of the pay-out period of pension amounts according to Swedish Pensions Agency’s records and is expressed in terms of so-called economic annuity divisors.⁷ An average of the preceding three years’ economic annuity divisor is used in the calculation of the pension liability. The financial breakdowns take into account any correlation between the size of the pension amount and the length of time it is paid. For more details, see the report “VER 2016-390 Payment Age and Economic Annuity Divisors”. In the years for which a balance index has been established the liability to pensioners is multiplied by the damped balance ratio established for the year \(t+1\).

Since 2018, it is no longer possible to earn ATP pension. The ATP pension liability to those who have not yet begun to withdraw old-age pension can thus be calculated without assumptions concerning future economic and demographic developments. Since 2019, the liability is valued as if ATP pension as yet unclaimed had been claimed in December of the current reporting year. The liability is calculated by calculating a ATP pension amount for each individual, taking into account age, which is then multiplied by the number of years the amount is expected to be paid out (the economic annuity divisor).

Premium pension assets are reported at their true value, or accrued acquisition cost, according to the regulations and general guidelines of the Swedish Financial Supervisory Authority (FFFS 2009:12) on Annual Reports of Insurance Companies. Assets reported at their true value as of the balance sheet date are valued at their price on the last trading day of the year. In the valuation of assets reported at accrued acquisition cost, the difference between acquisition cost and redemption price is periodized as interest revenue for the time remaining to maturity.

Temporary management consists of pension contributions paid in periodically during the year in which pension credit is earned; these are transferred to the premium pension system when the pension credit for the year has been confirmed. Assets under temporary management are reported at their accrued acquisition value.

Fund insurance assets refer to pension savers’ investment in funds and are reported at the redemption price for fund assets. The pension liability for fund insurance consists of fund insurance assets and of liquid assets not yet converted into fund shares. Traditional insurance assets are invested in equity and interest funds and are reported at their true value.

The pension liability for traditional insurance with profit annuity is determined for each insurance policy as the capital value of the remaining guaranteed disbursements. That value is calculated on assumptions about future returns, life expectancy and operating expenses. The return consists of an aggregation of the market interest rate on government bonds and guaranteed mortgage bonds of varying maturities. The market rate of interest is determined on the basis of the time remaining to maturity for guaranteed disbursements. The market valuation of the liability means that provisions set aside for life insurance are affected by changes in interest rates. Paid-in premiums are reported as lump-sum premiums and increase the guaranteed amount. Assumptions about life expectancy are based on Statistics Sweden’s population forecast from 2015, where mortality has been reduced by 10 per cent in order to better match mortality observed in the Swedish Pensions Agency’s stock. Operating expenses are assumed to be 0.1 percent of the insurance capital. Taken together, this means guaranteed commitments in traditional insurance have been valued carefully in accordance with established actuarial methods.