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If you’ve read my earlier posts about union bargained pensions and the importance of fees, you know by now that the pension scheme you get access to via a collective bargaining agreement is brilliant (low fees + great historical performance). But let’s dig in a little deeper.
Since financial literacy is something dear to my heart, pensions and the Swedish pension system have always been something I find it very important to understand. It’s also one of the most important aspects of Collective Bargaining Agreements (CBA) or 🇸🇪 kollektivavtal, because they regulate how much occupational pension your employer deposits on your behalf.
As regulated by CBAs the occupational pension deposits look like this:
– 4.5% to 6% of your salary up to 46 438 kr (2023)
– 30% to 31.5% on any excess amount, above 46 438 kr (2023)
For a white collar worker in the private sector earning 50 000 kr/month, that’s a minimum 3 159 kr/month in pension deposits (37 896 kr yearly).
4.5% x 46 438 = 2 090 kr
30% x (50 000 – 46 438) = 1069 kr
Total: 3 159 kr
Now, let’s do a comparison between a private pension solution (Avanza 75 default fund) and the ITP1 scheme (CBA). And let’s pretend the same % of money is deposited by Company X (despite not having a CBA) out of the goodness of their hearts.
Some assumptions about our Jane Doe and the financial markets:
- Starting salary = 50 000 kr
- 2.5% YoY salary increase
- Stays at Company X for 5 years
- Accrues compound interest for another 25 years before retiring
- 6.0% YoY value increase on the invested funds
- Private pension fund capital fee = 0.66% (Avanza 75 default fund), which is not that bad and one of the “better” private solutions you could get, there are far worse ones with fees above 1%
At the end of year 5 the employer will have paid approx 286 481 kr in pension deposits into Avanza, incl 6% YoY value increase and minus 0.66% in annual fees. And after 25 years Jane’s pension fund will be worth 1 041 949 kr, at which point Jane will have paid 187 590 kr in fees (!).
Had this been the CBA solution (ITP1) Jane’s fund would be worth 291 254 kr at year 5, incl 6% YoY value increase and minus 0.09% yearly fund fees (capped at 600 kr) and 0.8521% yearly deposit fees (capped at 450 kr). And after 25 years it would be worth 1 209 929 kr (167 980 kr more than the Avanza option), at which point Jane will have paid approx 20 100 kr in fees, since they cap out at 450 kr and 600 kr yearly respectively. That corresponds to 11% of the Avanza fees.
Now imagine if Jane Doe were to spend 30 of her working years in different companies without CBAs. Actually, don’t imagine it, let me do the math instead: 30 years would result in Jane Doe losing approx 650 000 kr in fees to the Avanza solution.
With an even worse solution (like SEB TryggPlan) with yearly fees of 1,06%, we’re talking 1 100 000 kr lost to fees!