Pension market alert: Sweden introduces salary cap for mandatory DC pension schemes 

Sweden introduced a salary cap from 1 January 2023 in the mandatory DC (ITP1) plan which applies to all employees born after 1978. This cap will be set at 30 income base amounts (equivalent to SEK 177,500 per month in 2022), which is the same as the salary cap that is already in place in the defined benefit (ITP2) plan which applies to those born before 1979.  Currently the company contribution rate to the ITP1 on salary components that will in future be excluded due to the cap is 30%.

All employees eligible for the defined benefit ITP2 with a salary exceeding 10 income base amounts can currently elect to switch to the ITP1 if their employer allows this. Some higher paid employees may have done this in order to benefit from the lack of a salary cap in the ITP1.

Since ITP1 pensionable salaries are reported monthly, employees who receive an annual bonus could exceed the salary cap for that month and not be entitled to pension contributions on parts of the bonus payment exceeding the cap.

As the ITP1 is part of a collective agreement, there is likely to be no legal requirement to compensate employees for “lost” company contributions in most cases unless a separate contractual agreement is in place. Our experience in other markets where salary caps have been introduced is that, after an initial period in which a minority of employers tried to replicate the “lost” portion of retirement savings using a supplementary standalone company plan, in the end the cap resulted in earnings over this level being no longer pensionable. 

In most cases, at the point of transition employees were compensated for the amount of “lost” company contributions through a one-off increase to salary or an allowance even when this was not a legal requirement. Some employers chose to provide the allowance on a decreasing scale or only for a temporary period.