Fennell Betson reports on the changing scene
The Swedish pension scene is on the move. And it is not just the new state scheme that is propelling things forward. A number of forces are combining to bring about a radical change in thepensions marketplace. However, it is necessary to keep matters in perspective.
Forseeably, the average Swede is still going to retire with the bulk of his pension coming from state provision, though increasingly this will depend on the contributions he makes and his level of earnings. There is also the added spice of the new defined contribution portion investing directly in funds (see below).
But changes are affecting the massive 'blue collar' and 'whitecollar' supplementary pension plans agreed beween the respective unions and employer bodies. These are designed to top -up state benefits. The 'blue collar' workers scheme, which was put effectively on a defined contribution footing in 1996, gives participants the right to arrange their plan with an approved insurer of their choice as from the New Year.
Under the 'white collar' scheme, employers provide the pension,which continues to be on a defined benefit basis, either through book reserving their liabilities on their balance sheets or by insuring them with the SPP insurance company, jointly owned by the unions and the employer bodies. But in the last two years, with the agreement of their unions, companies can use pension funds to put assets aside to meet their liabilities. Increasingly, companies are looking at at the question of funding these liabilies through a pension scheme, as Volvo and Telia have done, but other major Swedish corporates such as Astra and Electrolux are examining the area.
Financial factors are clearly behind these moves, as companies want to take advantage of the flexibility of having a funding vehicle, as well as obtaining any tax advantages. Companies, which have done well in recent years, see advantages in putting their currently high liquidity to this end. Another strand in their thinking may be that some companies which have run successful pension funds, particularly a number of the multinational groups which did not participate in the national supplementary systems, have done so well that they are paying little or nothing by way of contributions, thanks to good investment returns.
Since book reserve liabilities have to be insured against the possibility of the employer going bankrupt, an indication of the potential size of the market can be gleaned from the annual acounts of the FPG Pension Guarantee Mutual Insurance Company.
In 1996, these amounted Skr83bn ($10.8bn), having grown from Skr71bn in 1993. While over 2,100 companies were covered, FPG points out that the 10 largest companies it covered accounted for 38% of its exposure.
It is anyone's guess as to how many companies will eventually decide to set up pension funds to cover their book reserves, but if the major Swedish companies make the move, it could turn out to be turned out to be in the region of Skr40-50bn over time.
Another development is the growing interest by municipalities and local authorities in Sweden to cover their estimated Skr150bn of pension debts. Due to their restricted financial circumstances these liabilities are never likely to be fully funded. Stockholm-based investment consultants Wassum have carried out a survey of the potential of the municipalities market and reckons that some Skr30bn could be available over time for pension funding. Jan Bernhard Waage of Wassum reckons that only Skr5bn has been placed in the market so far, but he expects this to grow rapidly.
Moves by state organisations, such as the national post company, which has stated its intention of setting up its own fund, the airports authorities and electricity companies, could eventually mean more assets being funded. Some estimates put the funding from these bodies at perhaps around Skr50bn ultimately.
Consultants such as Stockholm firm Pensions och Försäkringskonsult (P&O) confirm a growing interest by employers of all sizes in having a funded pension arrangement and are helping their clients to set these up and administer them. At P&O, partner Peter Dahl puts his finger on the difference that having a fund can make when he points out: If the company keeps the money on the balance sheet, it will look at this as an eternal bank balance. But when it is separated into a trust fund, the approach is different and the investment will be more long-term."
The knock-on effect is to reinforce moves to using external investment managers, something that has been developing in the market for the past five years but now is gaining momentum.Companies are realising that whatever they can do about handling short-term assets themselves, they are not comfortable about the longer term investment.
It is a different ball game, as Bengt Sandberg at the institutional investment arm of SE Banken in Stockholm recognises. He says: "The trend is for clients to look for external managers, as they realise they do not have the expertise in-house." Swedish investors are used to investing in equities, in fact much more so than most of their Scandinavian neighbours, but becoming involved in running portfolios is an art they are learning.
Sandberg says: "We have been convincing our clients that they should have an investment policy, benchmarks, regular performance figures and reporting. Now clients are behaving more professionally about their investments."This in turn is driving the demand for asset management services. This year, two major insurers, SPP and Wasa have announced their investment management subsidiaries aiming at third party mandates. The presence of international investment groups on the market "has been hotting up", as one observer put it. And with the new state sponsored defined contribution scheme releasing an annual flow of funds in the direction of asset managers, that scene is only going to get hotter."