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

Market Structure (2004) Market Share (Assets) Default Fund 32% Next 20 funds 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

Share in total PPM assets Domestic (S) or foreign (U) Fund name Share in total PPM assets Return 2003 Pre-rebate fee Net rebate fee Domestic (S) or foreign (U) Non-chooser fund (Premiesparfonden) 31,8% 18,7% 0,50% 0,15% S AMF Pensions Aktiefond Världen 3,2% 21,5% 0,40% 0,27% Roburs Aktiefond Pension 2,8% 19,8% 0,42% 0,28% AMF Pensions Aktiefond Sverige 30,8% Didner & Gerge Aktiefond 2,7% 33,4% 1,25% 0,36% Roburs Aktiefond Contura 17,9% 1,44% 0,39% SPP Generation 50-tal 2,4% 13,5% SPP Generation 60-tal 2,3% 17,2% Roburs Aktiefond Medica 1,6% 0,9% 0,44% AMF Pensions Balansfond 1,5% 14,7% 0,29% SPP Generation 40-tal 1,4% 7,8% 0,30% Carnegie Fund Medical subfund 1,2% 16,1% 1,70% 0,52% U Folksam LO Sverige 1,1% 31,3% SPP Generation 70-tal 19,3% 0,31% Folksam LO Världen 8,7% Premievalsfonden 1,0% 19,6% 0,33% HQ Rysslandsfond 52,6% 2,50% 0,73% SEB Läkemedelsfond 0,8% -1,6% 1,50% 0,58% Carnegie Fund Worldwide subfund 6,8% 1,60% 0,62% SPP Aktieindexfond Sverige 0,7% 31,0% 0,23%

Charges of Administration of the PPM System   Year 2002 2005 2008 2011 2014 2017 2020 PPM charge 0.30% 0.23% 0.18% 0.15% 0.12% 0.08% 0.04% (% of assets) Fund charge* 0.41% 0.36% 0.32% 0.29% 0.27% 0.25% 0.24% Total charge 0.71% 0.59% 0.50% 0.44% 0.39% 0.33% 0.28%

Long run fees over assets

Long run fees over assets

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