Flexible retirement for employers

Flexible retirement, sometimes referred to as phased retirement, is now a feature of many collectively agreed occupational pension schemes. But what does it actually mean? In this article, we explain what flexible retirement is and what employers should consider when dealing with flexible retirement arrangements.

How flexible retirement works

What flexible retirement involves depends on the type of pension arrangement in question, namely whether it is a defined contribution or a defined benefit scheme.

Simply put, in a defined contribution pension scheme, retirement benefits are based on the contributions paid in during an individual’s working life. Contributions are usually calculated as a predetermined percentage of salary. The value of the future pension is then influenced both by the contributions made and by how the accumulated pension fund grows over time.

In a defined benefit pension scheme, the pension is instead calculated based on factors such as salary, length of membership in the pension plan, age and other contractual criteria. Defined benefit pension schemes, such as ITP 2, allow an employee, subject to agreement with their employer, to reduce their working hours while continuing to receive pension contributions broadly equivalent to those associated with their previous working hours.

For defined contribution schemes, such as ITP 1 or SAF-LO, flexible retirement instead consists of an additional pension contribution, usually between 1 and 3 per cent of pensionable salary under the applicable collective agreement. Although this percentage may appear modest, these additional contributions can make a significant difference to future retirement benefits over the course of a working life by increasing pension savings and providing greater scope for long-term investment growth.

What are the implications of flexible retirement?

When phased retirement is taken within a defined benefit pension scheme, the impact on the standard occupational pension is normally limited. Any effects may, however, depend on whether the pension arrangement includes supplementary benefits and how those benefits are structured.

On the other hand, a reduced level of employment at certain salary levels may result in the employee accruing a lower entitlement to the Swedish state pension, as this is based on the gross earnings actually received during the relevant period. Therefore, it is important to consider the overall picture when planning a future transition to flexible retirement.

For employees with defined contribution arrangements, the flexible retirement element normally consists solely of an additional contribution to the occupational pension. The value of the future pension may therefore be affected by market performance, as it depends on the investment returns generated by the accumulated pension savings.

Who is eligible for flexible retirement?

Eligibility for phased retirement or flexible retirement is normally governed by the relevant collective agreement.

However, reducing working hours through flexible retirement or phased retirement is not a unilateral decision that an employee can make independently or demand as a right. Such arrangements generally require an agreement between the employer and employee regarding reduced working hours.

If the parties are unable to reach an agreement, some collective agreements may contain provisions for negotiations between the employer and the trade union to assess the possibility of phased retirement or flexible retirement.

If the employer considers that phased retirement would cause significant disruption to the business, the request may in certain circumstances be rejected. Depending on the applicable collective agreement, any disagreement may then be subject to negotiations in accordance with the agreement’s rules and procedures. If the matter proceeds to local and subsequently central negotiations without the parties reaching agreement, the employer’s decision will ultimately prevail.

It is therefore important that employees enter into discussions with their employer well in advance regarding the conditions and practical implications of a future transition to flexible retirement or phased retirement.

Do you have an employee who wants to take flexible retirement?

If an employee intends to reduce their working hours through flexible retirement or phased retirement, it is important that the employer and employee enter into a written agreement. This reduces the risk of future misunderstandings and clearly sets out the terms that will apply.

The agreement should include:

• The date from which the new working pattern will take effect.
• The employee’s employment percentage before and after the change.
• The salary payable under the new working pattern and any impact on variable pay elements.
• Confirmation that both parties understand that the new working arrangement is intended to apply on an ongoing basis unless otherwise agreed.
• How pension contributions and other employment terms will be affected, including any implications under employment protection legislation and whether these matters need to be specifically addressed in the agreement.

It is also important to inform the employee that reduced working hours may affect other forms of compensation and benefits. This may include, for example, entitlement to the Swedish state pension, sickness benefits and future salary progression. Employees should therefore be encouraged to carefully consider the consequences before the change is implemented.

For employees with defined contribution pension arrangements, reduced working hours normally mean that both salary and pension contributions are calculated based on the new employment percentage. However, the additional contributions previously paid through the flexible retirement arrangement remain part of the employee’s pension savings. The value of the future pension will then depend on ongoing contributions, investment growth and the length of time contributions continue to be paid.

Do you need help managing flexible retirement as an employer?

It is important to remember that the rules governing flexible retirement and phased retirement, including application procedures, negotiation processes and eligibility requirements, may vary between different collective agreements.

At Azets, we are happy to support employers in understanding the requirements of the relevant collective agreements and managing the process correctly and efficiently. If you have any questions, please do not hesitate to contact us.