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Market approaches nudged off course

In his 2004 state of the union address to the US Congress, President George W Bush called for part of social security to be invested in individually chosen funds – something he made part of his election campaign later that year. 

“We should trust Americans by giving them the option of investing part of their Social Security contributions in private accounts,” he said. 

The idea never got off the ground.

Bush’s White House policy machine would undoubtedly have studied the Swedish experience. Sweden introduced a market component to its pension system in 2000 with the Premium Pension. 

Despite several reforms, mostly to the default fund, the system largely continues intact, with over 800 funds on the Premium Pension platform, even though 99.5% of (mainly young) new entrants do not make an active choice.

Since the financial crisis of 2008-09, such market-orientated ideas have often been shelved in favour of behavioural influenced policies, such as auto-enrolment. As the UK has shown, this can be a success, and recent increases in the contribution rate have not knocked the policy off course.

The decision to award the Nobel prize for economics to Richard Thaler, a renowned behavioural economist and co-author of ‘Nudge’ – the best selling popular book on behavioural economic theory – reflects a sea change in attitudes towards personal decision-making in investment, including in Sweden.

Last year the Swedish government appointed Stefan Lundbergh, director of Cardano Insights, to conduct the second stage of a reform into the Premium Pension system. The first stage, which comes into effect next year, involves new requirements on fund providers and a procurement-based system for funds. 

Yet rather than stemming from a holistic assessment of the shortcomings of a market-based social security pension system, it was a direct reaction to incidences of fraud within the system in the form of boiler room scams and such like. 

“Sweden’s experience shows how arduous dismantling of poorly constructed architectures can be”

Lundbergh opposes extensive choice within the Premium Pension system and calls for a lower risk default fund; it had previously been argued that Swedes could take more risk with their 2.5% contribution as it was a small part of their overall salary and future pension. Lundbergh’s cautious approach has not been universally welcomed.

Yet his prescription is a holistic one. Lundbergh argues that Sweden’s politicians, as principals of the system, should focus on outcomes. In other words, they should focus on the need for a secure income stream in retirement and design policies accordingly rather than making prior judgements about policy instruments.

If nothing else, Sweden’s experience with the Premium Pension system shows how arduous and time-consuming dismantling of poorly constructed architectures can be.

Liam Kennedy, Editor
liam.kennedy@ipe.com

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