Inquiry into Swedish PPM system produces opposing recommendations
SWEDEN – The results of an inquiry into Sweden's defined contribution pension system, the PPM, recommend either leaving it intact or cutting the number of funds within it "dramatically".
The inquiry, headed by Stefan Engström, recently presented its findings to the government, and the two proposals are now out for consultation.
The proposal to leave the system more or less unchanged "prioritises freedom of choice".
However, the inquiry also cited the relatively high cost of supporting so much choice – there are currently more than 800 funds in the system.
It also pointed out that, with so many funds, the difference between the best and worst performers can vary "enormously".
The second alternative would limit choice to between one and 10 funds.
In practice, the individual would be able to select only the level of risk he was prepared to take, as opposed to choosing a fund provider.
According to the inquiry, this option would also mean the spread in returns would narrow, and the cost of managing assets fall.
Engström said the government would now have to decide what exactly the system's objective should be, and pointed out that freedom of choice "has a price".
He said he would prefer to see this system abolished, or coordinated with AP7's management of the default fund, as it has a low-risk alternative.
He added that, if the traditional guaranteed concept is kept, it should be coordinated with AP7.
Engström also points out that, with the current traditional guaranteed concept, individuals are at the mercy of the stock market movements at the time of retirement.
He recommends that risk be reduced step by step the older the individual gets, which again is what happens in the government default option managed by AP7.
AMF, one of the largest pension providers in Sweden, lent its support to the more radical proposal, with fewer funds and stricter requirements, which it said would cut costs and make the number of funds more manageable.
It said it would also like to see a cap on fees and the introduction of an annual fee per fund, which would incentivise fund companies to reduce the number of funds in the system.
Skandia said it would want the "roulette effect" removed if an individual retired just after a market crash.
Yet, being one of the larger providers of guaranteed traditional products in the country, it also argued that, instead of simply offering a low-risk fund at retirement, this option should be available much earlier to build up capital, with a built-in guarantee.
The Swedish Investment Fund Association welcomed the debate sparked by the inquiry and proposed opening up the PPM for private pensions
But it also argued that the system "generally" worked well and rejected any "dramatic" changes.
Engström's proposals will now go out for consultation, after which Sweden's various political parties will give their views on the matter before a second round of consultation.