AP7, Skandia tussle over default option in Swedish DC system
SWEDEN – The default option in Sweden's national defined contribution system, the PPM, should be dropped in favour of a traditional guaranteed insurance product, Skandia has said.
But AP7, which manages the country's default option, rejected the proposal out of hand, arguing that it would not be in savers' best interests.
The buffer fund pointed out that guaranteed products had found it difficult to meet their obligations, forced to reduce guarantees that, in the case of Skandia's products, dropped from 5% to just 1.25%.
It said the tactic used by providers of traditional products was to "bring the bonus rates to the fore", but it warned that while these rates looked great in good times they disappeared in bad times, while risk was transferred to the customer.
What is left of a guaranteed product, then, is a balanced fund, it said.
AP7 questioned whether those who opted out of selecting products in the PPM system needed another balanced fund with a large proportion of fixed income.
It said that, over time, those in the default fund could expect an 8% return, whereas balanced funds generally returned half of that.
The buffer fund also claimed that, because 86% of assets in the total public pension system have a performance similar to bonds, the remaining 14% has to have a high equity exposure to generate higher returns.
"Asset allocation sets the level of risk, which in turn decides return expectations," it said. "This is also true for Skandia."
Skandia's counter-argument is that AP7 is comparing apples with pears because the traditional option within the premium pension system cannot be selected until you retire, and will not protect against a stock market drop six months before.
Skandia also claims there is no evidence someone who has their assets entirely in equities would do better than someone with a traditional guaranteed insurance product.
The growing spat comes as AP7 undertakes a marketing campaign, which it was previously prohibited from doing for political reasons.
The default fund is currently 17% ahead of the average fund in the PPM.