SWEDEN - The Swedish premium pension system (PPM) should be tightened up, with fewer asset managers and lower management fees, according to proposals from the government appointed Premium Pension Committee.
The committee has also proposed that the €5bn AP7 fund, the default fund of the PPM system, should replace its low risk investment management policy with the European pension directive’s prudent person principle.
The committee, headed by Professor Karl-Olof Hammarkvist, was set up by the Swedish government in September 2004 to examine the design and performance of the PPM.
It has concluded that, although the premium pension system is working well and is “reasonably cost-effective” it should be simpler and cheaper for pension savers to manage their premium pension.
It suggests the number of PPM funds, which have grown from 450 in 2000 to 705 in 2005, should be reduced to between 100 and 200. “This is not a goal in itself but relates to how pension savers are utilising the fund selection and so may change over time,” the committee said.
The committee found that, although charges paid by pension savers for their premium pension were low by international standards, they could be lower,
As a major investor, the PPM can demand a rebate on the fund fees paid by pension savers. The committee said the PPM should use its muscle more effectively: “The premium pension can be made even cheaper if the PPM reviews the model for requiring a rebate from fund management companies and introduces fees to be paid by the fund management companies to pension savers.”
Returns to PPM savers have been modest, the committee said. It pointed out that the time-weighted return on PPM assets between 2000 and 2005 was minus 9%. This means that only SEK 0.91 remain of an average SEKr1 invested at the start.
The internal rate of return, however, has been positive since mid 2005 and stood at 21% in September 2005.
The PPM committee said the present AP 7 default fund should be converted to a ‘generation fund’ where the risk level is reduced as the pension saver gets older.
It also proposed that the fund should be opened up for active selection, and recommended that the low-risk requirement should be replaced by the prudent person principle.
Finally, the committee has proposed that the present system, with two authorities for old age pensions, should be scrapped and replaced by a separate, independent pension authority with responsibility for pension administration.