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Country Update - Sweden
The November edition of The Multinational reported that most Swedish companies had received a letter from SPP, the quasi-monopoly insurer to the nationwide white collar ITP pension arrangement, informing them of their allocated share of SPP’s substantial surplus.
Though the intention was for the funds to become available in late 1999, SPP’s plans were derailed by an objection from the competition authority. This related to the intention that the surplus funds could only be used to purchase SPP products. SPP’s Board decided not to appeal against this decision. Instead, it has just announced revised plans, which are considerably more flexible.
The plans will reduce core pension costs significantly for those companies fully participating in the SPP system - generally smaller employers. Further, the ability to use surplus may fuel a growing interest in establishing supplementary pension arrangements beyond the scope of the ITP plan, and should assist companies in paying for early retirements arising out of restructurings. However some significant tax issues, particularly the likelihood of a large corporation tax charge in 2000, mean that the news is not all positive. Co-operation of employee representatives will be required if companies are to utilise the funds as rapidly as possible.
The key features of the plans are:
- As soon as the arrangements come into force, companies will be able to take a cash payment of the higher of:
- 5% of the allocated surplus
- the amount spent since 30 June 1998 on premiums to any insurer to secure pensions of members of the ITP plan
- SEK 100,000.
- Thereafter, the principal use of allocated surplus will be to reimburse companies for insurance premiums to secure pensions for members of the ITP plan. These may either be ITP pensions, or supplements to ITP. In the latter case, agreement of employee representatives is required, and the reimbursement is restricted to 15% of the allocated surplus each year.
- Surplus may also be used to insure ITP pension commitments which were previously unfunded (under the book reserving system).
It now seems fairly likely that these new plans will receive the approval of the competition authorities, perhaps with some further modification. However, as well as problems with the competition authority, significant tax issues have arisen:
- The tax authorities ruled that the allocation creates an immediate corporation tax charge (28% of allocated amount) for member companies in the year of allocation - now expected to be 2000. This is despite the fact that the funds can be drawn on only gradually, and that the allocation could be withdrawn if SPP’s financing position deteriorated significantly. The backdating of initial reimbursement to 1998 (referred to above) should help ease the pain of this somewhat.
- Companies will still have to pay social security taxes (about 24%) on future premium payments, even if they are met from surplus - despite the fact that the surplus arises from funds which have already suffered this tax.
Whilst the government is being lobbied on these points, any change appears to require an alteration in legislation, and it seems rather unlikely that this will happen. On the second point alone, a change would reduce government revenues by some SEK1.5bn to SEK2bn per annum. If the tax position does not change, this would leave Foundations, the other way of prefunding ITP obligations, in a markedly superior position to the purchase of insurance from SPP, both on tax and flexibility grounds.
The Swedish scene is changing rapidly and we will keep readers abreast of these significant developments in Sweden, and how companies develop their retirement benefit policies and funding strategies in the light of them.
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