Experts in Denmark have been scrutinising the Swedish pension system for guidance on invigorating competition in the domestic retirement income industry, but concluded that copying their neighbours would be a bad idea.
Prompted by the Danish Competition Council saying in 2017 that it would analyse the free movement of labour-market pensions in Sweden as part of its wide-ranging work on competition in the home pension sector, industry association Insurance & Pensions Denmark (IPD) commissioned its own report into Swedish freedom of choice in pensions.
Now published, that study by independent consultant Ole Beier Sørensen – a former chief pension researcher at ATP – lists several reasons why Denmark should not follow Sweden’s example.
“The Swedish model and the associated experiences are interesting – for good and for bad – but they cannot be transferred to Danish conditions without profound changes in both the overall pension system structure and the pension policy objectives,” he said.
Free choice, according to his analysis, is not a prerequisite for competition and innovation, and does not necessarily lead to such effects.
Beier said the free choice in Sweden had led to a broad shift from guarantee-based traditional insurance with the ‘old’ providers, towards fund or unit-link insurance with commercial providers, particularly bank-run firms.
“An extensive distribution network and a broad customer interface appears to be a crucial competitive parameter,” he said, adding that the dynamics of relocation appeared to be somewhat provider-driven rather than customer-driven, and that more comprehensive considerations of the content and quality of the schemes did not seem to dominate.
The Danish pension market was competitive, Beier said, adding that there was a trend towards lower costs and more individual choices.
Compared to Sweden, what had happened in Denmark showed such results could be achieved in a traditional framework based on compulsory membership of collective schemes where important design and coverage issues were decided collectively, he said, adding that there could be significant benefits associated with this.
“A combination of regulation and voluntary industry initiatives has ensured customised options for free choice, lower costs, increased dynamics and increased transparency,” he said.
Commenting on the research, IPD’s new president Laila Mortensen said: “The Swedish experience of giving extensive freedom of choice is not necessarily good.”
Meanwhile, in the Competition Council’s 342-page report Competition in the Pensions Market, the panel – which oversees the Danish Consumer and Competition Authority – includes several pages of commentary about the Swedish system.
The report said: ”Sweden has historically had a greater degree of individual freedom of choice in the pension schemes than Denmark. This applies both to the possibilities of moving occupational pension schemes and to determining how pension savings should be invested.”
“An extensive distribution network and a broad customer interface appears to be a crucial competitive parameter”
Ole Beier Sørensen, independent consultant
However, it pointed to waning enthusiasm for such freedom particularly in the premium pension system, for example. Although two thirds of Swedish savers had made active allocation choices when the system was launched in 2000, it said, this proportion had fallen to 8% among new savers in 2003.
The council also noted that the premium pension fund options actively selected by savers had higher levels of costs than the default option, which also produced a significantly better return.
Noting that in Sweden’s four large collective agreements on occupational pension schemes, savers are allowed to move all or part of their pension scheme between a number of pension companies. The council’s report said that in practice most savers that have moved their pensions from AMF had done so following prompting by a professional – mainly from the saver’s bank.
Figures released separately this week by the pension fund AMF in its 2019 transfer report show that every fourth occupational pensions transfer takes place without the customer’s knowledge, and that in one in three cases, the individual’s savings ends up in an unwanted product.
Johan Sidenmark, AMF’s chief executive officer, said the right to be involved in choosing their pensions manager was basically very positive, giving individuals more influence over their future and encouraging pension firms to improve.
“On the other hand, it is a major point against it that so many move or are moved without being aware of it, year in year out, and that so many end up in savings that don’t match the characteristics they want,” he said.
This was not sustainable and threatened to undermine confidence in the whole occupational pension system, Sidenmark said.