Sweden
In 1999, Sweden introduced a new pension system, according to which the pension consists of three parts: notional funded, funded, and guaranteed. By the way, the principles underlying the Swedish pension system were also used in developing pension systems in other countries.
Notional funded pension. This part is a pay-as-you-go (distributional) pension. (A pension is called distributional if it is paid to current pensioners from the contributions of current payers, i.e., redistribution occurs from generation to generation.) Its size directly depends on the employee's wages, and it is formed from contributions amounting to 16% of wages. These contributions accumulate notional savings, i.e., not real money but obligations are accumulated. Notional savings are indexed taking into account the growth rate of wages and the demographic situation in the country. The size of the pension is determined based on notional savings and life expectancy. The formulas for indexing savings and determining the assigned pension make the notional funded pension system self-regulating, adapting to changes in the demographic and macroeconomic situation in the country. The age at which payment of this pension is allowed is 61, but it can be claimed later.
Funded pension. Its size, like that of the notional funded pension, depends on the employee's wages, with 2.5% of wages being contributed to an individual pension account. The difference from the previous component is that real money is placed in the accounts, managed by pension funds, which invest it using market mechanisms. The employee has the opportunity to choose a private pension fund or even several funds where to place their savings. Significant restrictions are imposed on the investment activities of funds in Sweden. Pension funds are supervised by the country's Ministry of Finance, which conducts an annual financial audit and then reports on the funds' performance to the national parliament. It is worth noting that Sweden currently has more than 500 pension funds, and this seriously complicates the choice facing the employee. Payment of the funded pension can also begin after the employee reaches the age of 61.
Guaranteed pension. It is paid to citizens who receive too small a notional funded and funded pension or do not receive them at all. The guaranteed pension is financed from the state budget and begins to be paid upon reaching the age of 65. It is set in full for people who have lived in the country for 40 years after reaching the age of 25. For each missing year, the amount of the guaranteed pension is reduced by 1/40. On average, the replacement ratio provided by compulsory pension schemes is 68.2% (the replacement ratio equals the ratio of the average pension to the average wage).
Voluntary pension provision. Voluntary occupational pension systems, regulated by a collective agreement between the employee and the employer, have become widespread in Sweden. They cover about 90% of employees and provide an additional pension averaging 10% of the 'final salary'. The rules for calculating the final salary vary among different pension schemes: it can equal the average salary for one, three, five years, etc.
Individual voluntary funded pension schemes are also gaining in popularity.
United Kingdom
The UK state pension system is one of the oldest in the world. The first state pensions here began to be paid in 1908, when the Old Age Pensions Act was adopted.
The modern pension system in the UK, like in many other developed countries, is multi-tiered. Moreover, by international standards, it is extremely complex; even within compulsory pension provision, a wide range of options is offered.
Basic level. Its main element is the Basic State Pension (BSP). It is received by men over 65 and women over 60 who have paid national insurance contributions for the required number of years. If an employee's income is above a set threshold, they pay these contributions and thus earn special insurance service. The amount of the basic pension is determined depending on this service. The basic pension cannot exceed a certain level. For a long time, the basic state pension was indexed in line with price growth, which led to a decrease in its share of total pension payments.
Within the basic level, it is also possible to receive a pension benefit, or Minimum Income Guarantee (MIG), which is financed from general taxation. The benefit is awarded based on a means test of the pensioner's income. If the amount of state and private pensions received and the amount of savings are below a certain level, an additional benefit of a set amount is awarded.
This benefit can be paid from the age of 60. Since 2003, the Minimum Income Guarantee has been transformed into Pension Credit (PC). The main distinguishing feature of Pension Credit is that payments of this benefit begin from the age of 65.
Second compulsory level. It is also distributive and financed by employee contributions. Unlike the pension paid at the basic level, here there is a direct link between the size of the pension and the amount of contributions paid.
By default (in the absence of expressed preferences), the second level is provided by the state pension program, which provides payments proportional to earnings. An employee who does not wish to participate in the state pension program may opt out, but in this case he is obliged to participate in some supplementary pension scheme.
The State Earnings Related Pension Scheme (SERPS) was created to provide an earnings-related pension for those who did not participate in occupational pension schemes. Since 2002, this pension scheme has been gradually replaced by the State Second Pension (S2P), which is intended to ensure a decent level of pensions for low-income individuals and the disabled. Practice shows that young people and high-income citizens are more willing to move from the state pension system to supplementary pension provision, while low-income citizens predominantly remain in the state pension program.
On average, the replacement rate provided by mandatory pension schemes is 47.6%.
Supplementary pension provision. In the UK, there are many different ways to accumulate private pensions. Occupational pension schemes are the most widespread. Employees conclude a collective agreement with the employer, on the basis of which he makes pension contributions and forms pension payments. Most occupational pensions use a defined benefit mechanism, i.e., the amount of payments corresponds to a certain proportion of the final salary. However, defined contribution schemes are also used – in them, the level of benefits becomes known only at the actual pension application and depends on the amount of contributions, investment income, retirement age, etc.
A citizen can also save for a pension through the personal pension system, operating on the basis of individual pension savings accounts with defined contributions.
Insurance companies play a significant role in the UK pension system, providing many services for supplementary pension provision of the population, ranging from personal insurance of employees to pension provision under occupational schemes.
Supplementary pension provision significantly differentiates pensions: the total replacement rate for compulsory and voluntary schemes for the richest pensioners (top 5%) is 87%, while for the poorest (bottom 5%) it is only 21%.
France
The French pension system includes a large number of different pension schemes depending on the professional group of the employee. The two most significant schemes are the “general” scheme, covering private sector employees, and the “special” scheme, intended for public sector employees. The schemes are managed on a parity basis by “social partners,” i.e., representatives of trade unions or workers' associations, on the one hand, and employers, on the other (under state control).
In the last decade, a number of legislative changes have been made in both the mandatory and supplementary (voluntary) pension systems. In 1993, a reform of the “general” scheme was carried out. The 2003 reform affected public and private sector workers, and in 1993, 1994, and 2003, changes were made to voluntary schemes for private sector employees.
The modern French pension system consists of three levels.
The first level is a scheme based on the pay-as-you-go (PAYG) principle and financed by employee and employer contributions. It is calculated both on the basis of defined benefit formulas and defined contribution formulas. A minimum level of pensions is also provided for pensioners over 65 with low incomes. Such pensions are financed from general taxes. Currently, 8.1% of citizens over 65 receive minimum pensions.
For private sector employees, the first-level pension consists of two parts: basic and supplementary. The basic pension is calculated as a part of the average salary over the best years of working life. Within the “general” scheme, the basic part is supplemented by mandatory supplementary schemes: Association des Regimes de Retraite Complementaire, ARRCO (mainly for unskilled personnel) and Association Generale des Institutions de Retraite des Cadres, AGIRC (for management and skilled personnel). The supplementary part operates on the PAYG principle and is a defined contribution scheme.
For public sector employees, within the first level, only a basic pension is assigned, calculated on the basis of the final salary, taking into account the number of contribution years. Although a mandatory supplementary pension is not provided for public sector employees, their basic part is higher than that provided by the “general” scheme for private sector employees.
Contributions forming the basic part of the first level are 6.55% of wages for employees (+0.1% of wages exceeding the “social security ceiling,” SSC) and 8.2% of the employee's wages for the employer (+1.6% of wages exceeding the SSC).
To receive a full pension under the “general” scheme, one must reach the retirement age of 60 and confirm payment of insurance contributions for 40 years. The new rules established in 2003 increased this period to 41 years from 2008, and to 41.9 years from 2020. Other schemes may have different retirement rules.
On average, the replacement rate provided by mandatory pension schemes is 68.8%.
The second level is professional voluntary schemes (Plan Partenarial D’Epargne Salariale Volontaire pour la Retraite, PPESVR), which can be based on the PAYG principle or be fully funded (depending on the employee's professional group).
The third level is individual voluntary pension plans (Plan D’Epargne Individuelle pour la Retraite, PEIR). In 2000, about 46% of French households participated in at least one private pension program.