Riksrevisionen (the Swedish National Audit Office) has made three key recommendations following an investigation into the country's PPM system, which constitutes the third part of long term savings linked to employment alongside the income pension and guarantee pension.
The NAO found that future pensions are likely to be negatively affected by lack of efficiencies, which is why it has recommended that fund managers be required to systematically show all costs. Contributions into PPM funds are obligatory for some seven million Swedes. There were some 800 funds registered in the system as of autumn 2018, managing assets worth some SEK1.2trn (€117bn). The share managed by private fund managers is some SEK700bn, with the remainder manged by AP7 Såfa - the default fund for those who do not wish to make active choices.
The NAO said its inquiry covered the period 2000-2017, during which a number of problems have been highlighted.
The Office said its inquiry concluded that the total assets would have been 4% higher today if it has been managed in passive index funds, which it defined as a form of management that can be pursued at low fees but still provide a realitively good return.
However, it added that efficiencies in the system are also impacted negatively by the passive approch of investors. Most do not react when the funds raise their fees, but keep their capital in the same fund. This is a problem given that it is assumed that investors' choice of funds is the mechanism by which less capable portfolio managers are filtered out.
The inquiry also concluded that fund of funds solutions on average lead to higher fees without improvements to the value of assets.
And the problem is exacerbated by the fact that no authority has expressed responsibility for following up and gauging cost effectiveness of funds, and that the division of responsibilities between supervisory authorities is not sufficienctly clear.
Recommendations
The NAO recommends that the Swedish Pensions Agency (Pensionsmyndigheten) develop tools to facilitate ongoing evaluation of cost effectiveness in the area of asset management in the PPM.
And the government should raise requirements on those fund providers that wish to be included in the PPM system, such that they publish all costs as well as ensure the Pensions Agency effect regular evaluations of cost effectiveness in the PPM system.
The Swedish Investment Fund Association (Fondbolagens förening) said it viewed the recommendations positively, but pointed out that management fees have been successively reduced in the PPM system, and today are at 0.22%.
Returns from PPM have averaged 7.1% annually since launch, against 3% for the so called income pension - the latter accounts for 16% of income set aside for pension savings, while PPM takes 2.5%.
