Up to SEK380bn (€40bn) in Swedish long term savings could inadvertently be shifted from self-selected active funds to a default public fund that is at least partly passively invested should proposals affecting the country’s PPM system be enacted, warns the Swedish Investment Fund Association.
Per Bolund, minister for Financial Markets and Consumer Affairs and deputy minister for Finance, has received the final report of en enquiry – Premiepensionsutredningen – which proposes that the Swedish Pensions Agency should place relevant capital of new savings directly into the AP7 default fund, and thereafter inform long term savers of the other portfolio models available, such as risk portfolios also managed by AP7, or own portfolios of funds that can be selected from the PPM platform. The hitherto self-selection model of PPM facilitates heavily rebated access to actively managed funds as part of Sweden’s multi-pillar long term savings model. The report proposes that the new rules be put in place by 1 July 2017.
Enquiry head Patric Thomsson stated that it was reasonable to demand regular attention be paid to investments from that those who used PPM to select active funds from the platform or ready-made risk portfolios. This was why the enquiry was proposing regular reminders every seven years, which would highlight the different portfolio models.
However, the Association has responded robustly to what it sees as a degrading of the ability for long term savers to self-select actively managed funds on the country’s biggest funds platform. Its response refers to statistical evidence of how the platform is being used currently. Its own figures suggest up to SEK100bn (€10.4bn) could end up being passively invested in ex-Sweden assets.
“[The enquiry] estimates that up to a third of active selectors would in this way miss out on being active again. What we see is simply a way to close the Premium Pension system’s fund supermarket through the back door,” said Fredrik Nordström, chief executive of Fondbolagens förening.
Instead, the Association says that efforts should be put into helping long term savers, especially those who have not changed funds for a long time. The proposals would hit everyone who has engaged in self-selection, regardless of whether they might have looked over their selections in the past week, had good returns, or perhaps selected long term solutions with which they are satisfied.
“We now have an equiry that explicitly proposes barriers that make investors passive instead of helping them evaluate their fund portfolios. The Pensions Agency should on the contrary be given a clear mission to support and educate around the Premium Pension,” Nordström added.
The Association says that some SEK580bn is currently invested in self-selected funds, with about SEK290bn in the AP7 Såfa fund currently. Future reoccuring obligatory selection would see that share increase over time, while a shift to AP7 of the size suggested by the enquiry would mean very large outflows from the Swedish stock market and lead to significantly less access to capital for Swedish companies, the Association also warns.
The Association suggests that PPM has delivered better returns than certain other types of pension savings, while enabling savers to invest according to their own preferences on sustainability, risk levels, portfolio manager of other factors. And it cites a survey suggesting that six in 10 Swedes on average want the ability to self-select funds.
A survey commissioned by the Association points to half of PPM users looking over their fund investments at least once a year. Including thsoe who look over their investments with a few years’ interval, the proportion rises to 65%. And it notes that a quarter of selections made see money invested in so-called generationsfonder, where the point is that the investor does not have to be active. Of those who do not rely on either AP7 or generationsfonder, then half have switched funds in the past five years, and 29% have switched in the past three years.
The association also argues against the idea suggested by the enquiry that use of a single, bigger fund would benefit long term savers. This is not so, it says, because people will enter and exit the fund at different times, by definition being exposed to heterogeneous levels of risk.
And the enquiry has not sufficiently analysed the impact of recent changes affecting the existing PPM system, the Association feels. For example, it has not sufficiently looked at the benefits that more broadly available financial advice online will facilitate in terms of better selection and at cheaper cost to investors, the Association argues.
Other PPM developments
Sweden’s Premium Pension forms part of the state pension entitlement. Every salaried worker sees 2.5% of their income paid into PPM. This is aggregated via the fiscal system, and is put into an individual account in December following the year during which the money was paid into the system. From the indivudal account, users can self-select funds, or rely on the default option, which is AP7.
As recently as 16 September, the Swedish Pensions Agency, which is responsible for operating the PPM platform for fund selection, announced an agreement with all involved parties that will increase consumer protection for users.
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