SWEDEN - The Swedish government is proposing wide-ranging changes to the country's premium-based pension system (PPM) and AP7 - responsible for managing the premium choice and default funds - which will see both scrapped and transformed into a single new type of fund, in a bid to increase choice, fairness and simplicity.

One of the changes proposed is that the default fund, which cannot be actively selected as an investment option nor opted into once an individual has left it once, will be given the characteristics of what is described as a ‘generation' or lifecycle fund and be fully selectable as an investment option.

Investors in the new ‘generation' fund will also be able to choose their risk profile. Those who do not make an active fund selection will have their assets placed in a fund where the risk profile corresponds to their age as well as the total risk of the person's entire old-age pension.

The funds will not be traditional generation funds but policyholders will instead be 100% invested in equities until the age of 55 after which time the proportion of bonds will be gradually increased. The proposal will also make it possible for those who have earlier made active investment choices to move back into the government default option.

All existing savings from the default fund will be moved to the new alternative during May 2010. Investors will then be told of the new options or they can choose any of the other funds in the system.

The assets from the Premium Choice Fund will be divided between all the funds in the system, in just the same way as when any other fund in the system is liquidated.

In addition, those investors who would like a different risk-profile than the pre-determined age-related option will be offered ready-made portfolios with different risk-profiles, managed by AP7. These risk-profiles will be low, medium and high risk, depending on the individuals' age and total risk profile of their total pension assets.

AP7 will be able to offer one of the most cost-efficient products within the system, with a fee of 0.15%. Yet it is not clear at this stage how many alternatives will be available, as the government has suggested it is likely to be between three and 10.

The proposals have been discussed and agreed by Pensionsgruppen, a working group within which all five Swedish political parties in government are represented.

Mats Odell, the Swedish minister for local government and financial markets, said the premiumpension is an important part of the pension system but many individuals are not making active investment choices. He believes the changes will therefore be better suited to the investors' level of knowledge and engagement while at the same time being fairer.

The proposals also suggest that the new entity replacing Premiepensionsmyndigheten (PPM), Pensionmyndigheten, the Pensions Authority, should be able to charge investors for changing funds, in order to better divide the costs between those who are actively making choices and changes and those who do not. Odell said these costs are today shared between those who regularly make choices and those who do not, making it unfair to those who are paying for other people's choices.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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