The premium reductions mean it will be less expensive for companies during 2008 and this will also reduce the future risk of complicated management of surplus funds with negative tax consequences for companies.
Not a new method
The method of not charging a full premium is not new. In 2002 premiums were discounted by 15 per cent. Prior to that a general discount of 20 per cent was applied over two decades until the mid 1990s. This is because the “normal premium” for defined benefit ITP functions like a premium ceiling which according to the rules may not be raised, only reduced. It therefore includes a safety margin.
Good funding with no surplus
The pension capital that belongs to the defined benefit pension insurance (where pension levels are determined by the insured individuals’ salary toward the end of their working life) today has funding at the levels required for us to be able to meet our liabilities towards your employees in a sustained manner.
At present there is no capital that can be regarded as a lasting surplus available for distribution.
The very strong funding ratio reported earlier in the autumn has fallen back to within the band specified in the policy due to development in the financial markets, a board decision on indexation of pension commitments, and adjustment of Alecta’s mortality assumptions.
Alecta’s funding is certainly good and our assessment is therefore that without measures in the form of premium discounts we would risk building up a sustainable surplus. Our aim is that premiums should reflect our actual costs.
Collective insurance – not a capital investment
Criticism of Alecta has included views on who owns the capital in Alecta. In some newspaper articles it sounded as if the companies have “invested money” by paying premiums to Alecta, investments that in some sense can be linked to a specific company’s share or account.
But pension capital in Alecta is an insurance and it is in the nature of insurance that it is not entirely fair. How much a company pays in and how much total payments will be depend on a variety of different factors such as employees changing employer, differences in salary development, length of life and so on.
The defined benefit pension insurance that is regulated in collective agreements and for which you as client companies pay premiums is a collective insurance and not a capital investment.
Effects for your company
To sum up, the premium discounts will have three positive effects and one possible side-effect for your company.
- They will reduce your current costs and do not represent extraordinary income but affect operating profit.
- They will not result in any extra employer’s contribution.
- They are simple for your company to administer.
Funding policy
The funding policy stipulates the amount of capital needed in Alecta so that its operations can be conducted in an optimal manner. The funding policy is also indirectly decisive for Alecta’s premium setting and for the question of bonuses to our customers.
EU Occupational Pensions Directive
Incorporation of the EU’s Directive on Institutions for Occupational Retirement Provisions (the IORP Directive) which came into force in 2006 means new rules. Now both assets and pension liabilities are measured at market value which leads to considerably greater variations in funding and requires a higher funding target than before.
Indexing obligations
Over time Alecta’s funding for defined benefit ITP needs to be about 140 per cent so that the company can finance the parties’ common goal of continual indexation of our liabilities in a sustainable manner.
The funding ratio is directly affected by fluctuations in the financial markets and the policy also allows it to vary between 125 and 155 per cent without any special action being required.
The decision on premium levels for 2008 was decided by Alecta’s board on 4 December 2007 when Alecta’s funding ratio was 149 per cent.