THE SWEDISH SECOND PILLAR
Design, Performance,
Outstanding Issues, and
Applicability to Other Countries
Background
• Pension reform legislated in 1994
• Transforms PAYG DB Scheme into:
– NDC (PAYG) (16% contribution)
– FDC (FF)
(2.5% contribution)
• Makes occupational funds mandatory, converts
them from DB to DC (3.5% contribution)
• Therefore, second pillar has 2 components and
total contribution of 6%
• Presentation focuses on first part of second pillar
Background
• Reform only implemented in 2000
• Need to prepare IT systems, raise information
from 1960 (NDC capital)
• Individual choices introduced in 2000,
supported by:
– Local offices (SSSA)
– Call center
– Internet (personal account, providing information on
the system, pension projection model)
Design of Second Pillar
• Designed to minimize costs, especially in view
of small contribution of 2.5%
• Achievement of economies of scale and
competition simultaneously through: (i) single
basic service provider; (ii) blind accounts/blind
quotation system; (iii) several asset managers;
(iv) system of fee rebates
Design of Second Pillar
• The single basic provider: The Premium Pension
Authority (PPM), utilizing the existing structures
of the SSSA and the Tax Authority
• Functions of PPM:
– Organizes collection of contribution through SSSA
and Tax Authority
– Manages accounts, information
– Contracts asset management from private funds on
behalf of members, clears all flows of funds
– Benefit payments (monopoly annuity provider)
Regulation, Structure, Performance
of Private Funds
• All asset management companies licensed in the
EU are allowed to operate
• By 2004, 75 companies licensed, managing 650
funds, 4.4 million participants
• PPM is the legal representative of all participants
vis-à-vis these funds
• Clients can choose up to 5 funds
• Non-choosers allocated to a default public fund
• In the first year, substantial information provided
by PPM and marketing expenses by private funds
Preliminary results
• Assets grew to 5% of GDP in 2004
• Large base, but small contribution and poor
returns in 2001, 2002
• Large share of participants making active
choices in the first year, declining sharply in
following years, average choice: 3.4 funds
• Strong preference for equity funds: 72% of
active choosers chose only equities
• Default fund has large share of equities (80%
equities, 10% indexed bonds, 4% hedge funds)
Percent of New Participants Making an “Active”
Investment Choice
80
70
60
50
40
30
20
10
0
2000
2001
2002
2003
2004
Market Structure (2004)
Market Share (Assets)
Default Fund
32%
Next 20 funds
32%
Next 580
36%
Costs of Operating Second Pillar
Three Basic Components
• PPM’s Own Operating Costs
– Internal management of individual accounts,
information to members
• Reimbursements to SSSA
– Revenue collection, sharing of annual individual
statements, sharing of local offices (NDC, FDC)
• Payment of Private Fund Fees, Net of Rebate
– Very low marketing expenses
– Rebate system based on size of assets, reduces fees
further
Fee Rebate System
• Gross charges apply to all customers, whether
in second or not
• However, to operate in second pillar funds
have to accept additional rules, especially a fee
rebate system
• Rebate increases (reducing net fees) with the
volume of second pillar assets managed
• Rebate is credited in the individual accounts
Distribution of Funds According to Pre-Rebate Fees
Number of funds
200
150
100
50
0
-0.24
%
0.25-0.49 0.5-0.74
%
%
0.75-0.99
%
1-1.24
%
1.25-1.49 1.5-1.74
%
%
1.75
%
% of Total Asse ts
50%
40%
30%
20%
10%
0%
-0.24
%
0.25-0.49
%
0.5-0.74
%
0.75-0.99
%
1-1.24
%
1.25-1.49
%
1.5-1.74
%
1.75
%
Share in
total
PPM
assets
Return
2003
Pre-rebate
fee
31,8%
18,7%
0,50%
0,15%
S
AMF Pensions Aktiefond Världen
3,2%
21,5%
0,40%
0,27%
S
Roburs Aktiefond Pension
2,8%
19,8%
0,42%
0,28%
S
AMF Pensions Aktiefond Sverige
2,8%
30,8%
0,40%
0,28%
S
Didner & Gerge Aktiefond
2,7%
33,4%
1,25%
0,36%
S
Roburs Aktiefond Contura
2,7%
17,9%
1,44%
0,39%
S
SPP Generation 50-tal
2,4%
13,5%
0,42%
0,28%
S
SPP Generation 60-tal
2,3%
17,2%
0,42%
0,28%
S
Roburs Aktiefond Medica
1,6%
0,9%
1,44%
0,44%
S
AMF Pensions Balansfond
1,5%
14,7%
0,40%
0,29%
S
SPP Generation 40-tal
1,4%
7,8%
0,42%
0,30%
S
Carnegie Fund Medical subfund
1,2%
16,1%
1,70%
0,52%
U
Folksam LO Sverige
1,1%
31,3%
0,40%
0,30%
S
SPP Generation 70-tal
1,1%
19,3%
0,42%
0,31%
S
Folksam LO Världen
1,1%
8,7%
0,40%
0,30%
S
Premievalsfonden
1,0%
19,6%
0,50%
0,33%
S
HQ Rysslandsfond
1,0%
52,6%
2,50%
0,73%
S
SEB Läkemedelsfond
0,8%
-1,6%
1,50%
0,58%
S
Carnegie Fund Worldwide subfund
0,8%
6,8%
1,60%
0,62%
U
SPP Aktieindexfond Sverige
0,7%
31,0%
0,23%
0,23%
S
Fund name
Non-chooser fund (Premiesparfonden)
Net rebate
fee
Domestic (S)
or foreign
(U)
Charges of Administration of the PPM System
Year
PPM charge
2002
2005
2008
2011
2014
2017
2020
0.30%
0.23%
0.18%
0.15%
0.12%
0.08%
0.04%
0.41%
0.36%
0.32%
0.29%
0.27%
0.25%
0.24%
0.71%
0.59%
0.50%
0.44%
0.39%
0.33%
0.28%
(% of assets)
Fund charge*
(% of assets)
Total charge
(% of assets)
Long run fees over assets
14%
12%
10%
8%
6%
4%
2%
Hungary Average Cost MPF
Hungary Highest Cost MPF
Sweden
Hungary Lowest Cost MPF
Chile
33
31
29
27
23
25
21
19
17
15
13
11
9
7
5
3
1
0%
Long run fees over assets
14%
12%
10%
8%
6%
4%
2%
Hungary Average Cost MPF
Hungary Highest Cost MPF
Sweden
Hungary Lowest Cost MPF
Chile
33
31
29
27
23
25
21
19
17
15
13
11
9
7
5
3
1
0%
Issues for Other Countries
• Attractive option, especially for small countries
• Strong aspects: combines economies of scale and
competition, leading to small fees
• Possible weaknesses/issues include:
–
–
–
–
–
Excessive number of funds
Investment regime without risk limits
Regulation of basic provider
Governance issues for public default fund
Monopoly on the payout phase
• Most of these potential weaknesses can be
addressed