Keen eye for pensions assets
Swedish life companies are going through a period of significant change and development. In the news currently is the acquisition of SPP Liv, SPP Fonder and the SPP brand by Handelsbanken, leaving the remainder of the SPP organisation to trade under the name Alecta. SPP Liv was created in 1994 expressly to penetrate the new market for pensions open to competition, and now has Skr80bn (e8.9bn) under management. The Handelsbanken/SPP deal puts Handelsbanken, which is demutualising, in the number one slot for occupational pensions, with a 35% market share; its private pensions share will climb to 25%.
The Alecta name came into being on February 1. The company will focus on pensions schemes for salaried employees based on exclusive joint agreements with employer and employee organisations. Currently its core business is the big ITP scheme – 600,000 lives – for salaried employees belonging to the PTK federation and working for companies in the Swedish Employers’ Confederation.
The pensions market has been very dynamic of late and promises to continue that way. Thanks to pensions reform, increasing prosperity and a trend towards personal responsibility for finance in retirement, the market has shown healthy growth, especially in voluntary private pensions (although the strongest growth has been in individual non-pension savings plans). Under the new state pensions arrangement, 2.5% of earnings are administered by the Premium Pension Authority which either invests in private sector funds of the individual’s choosing or makes a transfer to a state-run Premium Savings Fund. Last year Swedes were able for the first time to nominate the fund of their choice; two-thirds opted to make an active selection from a dizzying 400-plus private sector funds.
Historically, much of the pensions business was written on the basis of exclusive agreements with employers’ federations and workers’ associations, but these are increasingly being opened up to competition. The ending of exclusive agreements creates a growing and fertile market. Folksam, a mutual with a 7% overall market share, and which has always been close to employee associations, plans a vigorous attack. “We are setting our sights on taking 10% of the premium pension market,” says Tore Andersson, Folksam’s president and CEO. “Folksam’s goal is to be the market leader in occupational pensions.” The company has acquired a 60% stake in the formerly municipal and regional council-owned KPA Liv. KPA and its expertise will aid Folksam’s thrust into new markets.
The abolition of monopoly rights turns up the competitive heat in the Swedish market still further. Companies are looking for new forms of advantage over their rivals. SEB Trygg-Hansa plans to capitalise on its banking links with employers. “We believe a ‘corporate bancassurance’ model is the way forward,” says Kenth Eldebrink, SEB Trygg’s director of sales and marketing. “With our wide range of products and services we can provide bundled products that deliver synergies, cost savings and new forms of value specially for each individual client.”
Adri de Redder, chief investment officer at Skandia Liv agrees that relationships between life companies and banks will grow in importance. He also thinks that new competition for pensions money where the customer has investment freedom will come from abroad. “Swedish people are happy to do business with big, well known international brands like JP Morgan and Goldman Sachs.”
Skandia regards itself as a market leader in asset management, pioneering new investment strategies. Its life company has Skr265bn under management, representing three quarters of the total Skandia group funds. Currently 12% of its portfolio is in property, with the remainder almost equally divided between fixed income securities and equities. Sven Sandberg at Skandia Asset Management, which is responsible for the investments of the group, says that two thirds of equities are non-Swedish, while for fixed income the same split is reversed. “We are expanding our international assets,” he says, “and for us the trend is towards equities.”
At SEB Trygg, with Skr230bn of assets, investments are handled by SEB’s asset management arm. Here the mix is slightly different: property 10%, equities 42% and fixed income 48%. Moreover the trend has been towards fixed income over the last year. Sixty per cent of equities and 40% of bonds are invested abroad, a picture similar to that at Skandia.
At AMF Pension, another pensions specialist with close ties with employer and worker associations, but which has extended its market to other groups, all asset management is undertaken in-house. Tor Marthin, chief investment officer, says “We restrict our investments to western Europe and North America. Through focusing in this way we can concentrate our research to build up a detailed knowledge of selected markets. We don’t track indices either; we believe we can do better by carefully choosing our investments.”
Investment performance naturally tops the list of critical success factors for life companies. Skandia’s Adri de Redder says “Portfolios must be well diversified and able to cope with volatility. And of course you have to take a long-term view. For example, given longevity trends, the liabilities in respect of those born in the 1940s who are retiring now are not at all clear.” Skandia is constantly looking at new approaches in the quest for optimal performance; hedge funds are one option under consideration.
Companies agree too on other ingredients for success in the increasingly competitive market: fees and charges, service, knowledge of customers and the ability to provide solutions tailored to the each corporate client or to discrete groups of employees. Bo Soderstrom of SPP Liv adds mass marketing skills to the list. “It’s becoming increasingly important to deal with individuals,” he says. “Markets which are growing strongly are those where employees have a say in where their money goes. You have to understand individual customers, how to communicate with them and how to give them access.” SPP Liv is combining face-to-face selling with the telephone and investing in web technology to create an integrated distribution/ access set-up. SPP Liv will be keen to maintain its record as the fastest growing life company in recent years, and the deal with Handelsbanken should offer opportunities for scale economies. Responsibility for its asset management will lie with Handelsbanken.
What will form the next round of major pensions developments for Swedish life companies? Redder points to the harmonisation of pensions legislation throughout the EU, real steps towards which could start to emerge in around two years’ time, although other commentators extend the time frame somewhat. Looking closer to home, it may be interesting to watch the performance of mutual versus proprietary companies. Mutuals could come under pressure in the toughening competitive climate, though many do not have the financial strength to be able to shed their mutual status. There could be some merger or acquisition casualties.
It is an exciting time for Swedish pensions. Business is booming and a constant stream of new opportunities is emerging. These are relatively early days in a market that is adjusting to a relatively new pensions environment.
But settling down looks highly unlikely: the full effects of burgeoning competition have yet to be felt and EU legislation is on the horizon. Market development will be continual and rapid.