09 January 2020
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Data distributed by Swedish pensions information provider Pensionsnyheterna, and cited by local daily business newspaper Dagens Industri suggest that the default SEK595.5bn (€56.6bn) AP7 equty fund in the country's Premium Pension (PPM) system had a strong year in 2019, as returns hit 33.1%, the highest since 2013, outperforming the MSCI World equity index return of 27.3% in local currency.
The returns were boosted by currency movements, as the relatively weak SEK improved gains from the global holdings in the fund.
Dagens Industri notes additionally that the fund can use leverage, which during 2019 averaged 15% versus a historical level of 25%.
Such factors may explain why the fund returned more than the average for global equity funds available in the PPM system, of 29.5%, although the newspaper notes that certain other funds in the category did better than AP7, such as Danske Global Index and Nordea Global, which returned 34.2%, the Öhman Global Hållbar, which returned 34.1% and the AMF Global, which returned 33.5%.
AP7 as an overall default provider also runs a fixed income fund, with some SEK44.4bn (€4.2bn) of assets as of the end of November 2019. Savers' money is invested 100% in equities until age 55, after which profiling shifts assets into the fixed income fund to a maximum 67% exposure by age 75. The product takes in monthly premiums from people working in Sweden, who are required by law to put a proportion of mandated pension savings into the PPM system which acts as an additional pillar in the country's pension system.
The PPM platform operated by the Swedish Pensions Agency has undergone significant changes in the past year, as new laws kicked in requiring funds accessible for self-selection within the system to meet stricter requirements in respect of the number of years they have been in operation, the minimum assets held, and the proportion of assets derived from Premium Pension premiums versus non-pensions related investments. All funds on the platform have had to re-register to obtain ongoing authorisation for distribution this way. The list of funds that have been either rejected or voluntarily removed from the PPM platform following the introduction of the tighter rules is updated ongoing by the Pensions Agency, such as here: https://www.pensionsmyndigheten.se/content/dam/pensionsmyndigheten/blanketter---broschyrer---faktablad/f%C3%B6r%C3%A4ndringar-i-fondutbudet/V%C3%A4ljstoppade%20fonder%20pga%20nya%20Fondavtalet.%20v%202.xlsx while those that are approved are visible here: https://www.pensionsmyndigheten.se/content/dam/pensionsmyndigheten/blanketter---broschyrer---faktablad/f%C3%B6r%C3%A4ndringar-i-fondutbudet/Fonder%20som%20%C3%A4r%20godk%C3%A4nda%20enligt%20det%20nya%20Fondavtalet%20v.2.xlsx.
In November, a government-ordered inquiry put forward proposals to radically change the way the PPM platform works, effectively limiting self-selection. This followed a series of scandals involving assets going missing from funds amid concerns that lax regulatory efforts allowed criminals to take advantage of passporting rules across the EU to target individual long term savers in the Swedish market. But it also followed concerns about how industry costs may have been eating into long term average returns.
The inquiry report (https://www.regeringen.se/4adb1b/contentassets/8d5b58963b8d4734ab9f570abbbc2067/ett-battre-premiepensionssystem-sou-2019_44.pdf ) proposed additionally that AP7 be turned into a government agency, with the new name Myndigheten för premiepensionens fondförvaltning (literally translated: Agency for Premium Pension Fund Management), with responsibility for overseeing pre-determined choices in the PPM system, with much more limited choice for savers seeking to select funds themselves.
The Swedish Investment Fund Association responded robustly to the proposals in November. Its members do not believe that public sector employees will make the best fund choices for users of the PPM system, and that a restricted fund range will in the long term lead to poorer pension outcomes. This may also be the case if the proposed system pushes additional transaction costs on long term savers because they will not be able to choose when to invest or divest in particular funds.
The Association cites a survey published in October 2019, which suggests two-thirds of Swedes would prefer to be able to make their own fund choices. And it has criticised the government's proposed changes for failing to identify the state's own responsibility in respect of the need to improve financial literacy overall in the population, which was put forward by the inquiry as one of the reasons self-selection constitutes a danger to consumers ongoing.
As the inquiry report stated: "Experiences of the Premium Pension system in recent decades show that savers seldom act according to the ideal model for rational consumers".
