Increased costs for redemption of ITP2 old age pensions

Employers securing ITP2 old age pension commitments, themselves, are hit by increased costs with a change to using insurance to secure such obligations. This is a consequence of Alecta’s decision to decrease the premium rate.

According to the collective agreement, employers within the private sector apply the ITP plan for their employed white-collar workers. If the defined benefit old age pension according to ITP2 is secured through provisions in the balance sheet, a present value computation of the commitment is calculated by the insurance company, PRI Pensionsgaranti (PRI). In this present value computation, PRI applies its own interest rate assumptions in calculating the pension liability.

An employer who secures pension commitments, themselves, can always voluntarily redeem the entire amount or portions of the defined benefit commitments by, instead, subscribing to an occupational pension plan with Alecta. If a company’s financial position deteriorates, PRI can, as a final measure, require that the company redeem the entire commitment or a portion of it. This is referred to as mandatory redemption.

The Board of Directors of Alecta has determined that the premium rate is to be reduced from 1.5 percent to 1.1 percent from and beginning 1 October 2016. The premium rate is the interest rate applied in calculating the present value of future pension payments when an occupational pension insurance is subscribed to. The lower this interest rate, the higher the present value and, thereby, the insurance premium. Consequently, the reduction in the premium rate implies that the cost for redeeming pension liabilities reported in the balance sheet increases.

Historically, the redemption cost has been, on average, considerably higher than the PRI calculated pension liability. In the future, the difference between the redemption cost and the pension liability will be even greater. On average, the cost will increase by nine percent.

A change in the manner in which a company secures its pension commitments also impacts the basis of special employer’s contributions on pension costs (SLP). The premium paid for occupational pension insurance increases the basis for SLP. In return, this basis is decreased by an amount equivalent to the reduction in the reported pension liability. However, as the difference between the insurance premium and the PRI calculated pension liability increases, so does the basis for special employer’s contributions with a change in the manner in which pension obligations are secured. An employer considering a change in the manner in which their pension commitments are secured is also advised to analyse the accounting aspects and the income tax effects of such a change.

Anna Gustring Boman and Kristian Gustavson