Sweden considers limiting fund choices on PPM platform
After 18 years in operation, Sweden’s Premium Pension system could be set to drastically reduce access to choice of funds, following the publication of a report on behalf of the ministries of Finance and Health and Social Affairs.
Vägval för premiepensionen, authored by economist Stefan Engström, notes that it is 18 years since the first money was invested via PPM. And while the amount invested as a proportion of all retirement assets remains small -2.5% of pension savings of those born after 1954 is directed to PPM – its importance as a source of funding of retirement is expected to grow significantly in coming years.
The all-party Pensionsgruppen in Sweden’s parliament has initiated ongoing oversight of the country’s pension system, and it is in response to questions raised by this oversight that the report has been produced.
A key decision that the report puts forward is whether the country should continue to allow choice of funds via PPM, or aggregate the assets into a smaller number of funds, with little choice on the part of long term savers.
Engström has identified three key challenges in the status quo.
Firstly, the existing choice of funds means savers experience significantly different outcomes. Analysis suggests that in future the difference between those who happened to make the right allocation choices and those who did not could vary by a factor of five. This level of difference between individuals who may have enjoyed similar standards of living and paid similar levels of contributions to PPM will lead to problems, Engström suggests, because the basic pension is forecast to offer an average of just 50% of final salaries.
The second challenge of the existing PPM system is that it offers a selection of funds that many savers find overwhelming. The problem is that the ever growing number of funds on the PPM platform leads to rising costs for accessing the information required to make informed choices. PPM is compared with the US 401k system: in Sweden there are some 800 funds to choose from, whereas a 401k plan usually only offers some 10 funds.
The final challenge is costs. Engström says they are higher than they need to be. Interestingly, Engström notes that were the fund investments made through PPM attributable to the Swedish state, then investments in foreign assets would not be subject to local taxes. Instead, because of the way PPM currently works, the fund investors end up paying taxes in countries that apply such on foreign investors. This has an impact on returns, as the report suggests this particular tax burden alone could hit SEK5bn annually.
Engström concludes that there are two choices facing policymakers. One is to retain the current number of funds on the PPM platform, but introduce new rules in areas such as costs paid by those actively choosing where their retirement investments are being made. The other is to introduce a completely different type of system limited to some 10 funds including internally and externally managed funds, with different risk and investment objectives.
The first alternative prioritises choice but at a price in terms of higher costs and with broader outcomes for savers. The other alternative would take care of the three key challenges facing the existing system, but at the cost of reducing choice, Engström said.
To read the report, click here: [asset_library_tag 6700,Vägval för premiepensionen] (in Swedish)