The huge number of funds in the Swedish premium pension system has been an ongoing drama for years. Although no serious attempt has yet been made to try and reduce the number of funds despite considerable criticism, the question has finally been brought into the political arena.

Premiepensionsmyndigheten (PPM), the premium pension authority, wants to drastically cut the number of funds it offers savers on its platform and handed over its proposals for how to reduce the number of funds last year. The aim is to reduce the fund choice from almost 800 to between 150 and 300. The suggestions include an annual fee for asset managers wishing to list funds on the platform, the exclusion of funds with the lowest returns, and a cap of 10 funds per manager. Currently, it is free for investment firms who fulfil basic regulatory requirements to register funds.

However, the parliament’s pension group has finally taken some action to bring the PPM fund options into the light and discussed it during its June meeting. The group, which was recently restored after having dissolved due to internal disagreements, has representatives from all five parties that agreed on the Swedish pension reform.

Johan Hellman, the newly appointed director-general of PPM, is pleased that the work has finally taken off, although he is not convinced any changes are imminent.

“All I know is that the issue is being discussed and that there have been a number of proposals. We are waiting and hoping for something to happen,” says Mr Hellman.

One of the key problems with the PPM system has been that the huge number of fund options have made it difficult for savers to understand all of the investment choices. Indeed, about a third of the assets invested in the default fund are managed by AP7.

The Swedish system was even branded a failure by the UK minister for pension reform Mike O’Brien last year, because of its lack of simplicity.

“I can only conclude that many savers think it’s complicated having so many different investment options. The fact that a market has emerged where you can hand over your investments to different companies is another indication that something needs to be done to facilitate things for the savers,” says Mr Hellman.

The doubts of any real need for almost 800 funds has been further fuelled by recent statistics from PPM, which shows that 98.4 per cent of first-time pension savers did not make any choice last year. Instead, their assets ended up in Premiesparfonden, AP7’s default option. Only 1.6 per cent actually chose an investment portfolio compared to 7.4 per cent in 2006. When the system was launched in 2000, two-thirds of savers made an active investment choice.

Mr Hellman, however, does not believe this is a failure of the PPM system, but explains it as an effect of a new information strategy.

“We have changed our strategy from targeting the young first-time savers to slightly older people, which we believe are more receptive. We realised that younger people are not thinking about how to invest their pensions and their savings are also very limited. Instead, we are focusing our energy to reach people in their 30’s with savings of at least SKr25,000 (€2,660m),” Mr Hellman says. He intends to pursue that strategy, but does not believe there is anything wrong with ending up in AP7’s default option. The default option only returned 4.5 per cent in 2007 compared to average PPM returns of 5.9 per cent.

Despite global fund managers’ interest in getting a piece of the Swedish pension savings, the large well-known domestic firms continue to dominate. Out of the 10 most popular fund choices, eight are registered by Swedish firms.

IN BRIEF

• Premiepensionsmyndigheten, the premium pension authority, has suggested a number of ways to reduce funds within the system. It wants to reduce the fund choice from almost 800 to between 150 and 300. The suggestions include an annual fee for asset managers wishing to list funds on the platform, the exclusion of funds with the lowest returns, and a cap of 10 funds per manager. Currently, it is free for investment firms who fulfil basic regulatory requirements to register funds. There is, however, a limit of 25 funds per firm.

• Last year, a new fee structure was introduced with the aim of reducing costs for the end investor, making it far less profitable for fund managers to list their funds within the system. Managers have to give part of the investment fees they collect from savers back to the PPM, which are then returned to investors. This amount has now increased and SKr1.5bn (€160m) of fees was paid back to savers while the average annual fee for savers was reduced to 0.33 per cent.

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