1. THE SWEDISH SECOND PILLAR
Design, Performance,
Outstanding Issues, and
Applicability to Other Countries

2. 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

3. 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)

4. 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

5. 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)

6. 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

7. 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)

8. Percent of New Participants Making an “Active” Investment Choice

9. Market Structure (2004) Market Share (Assets) Default Fund 32%
Next 20 funds
Next 580
36%

10. 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

11. 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

12. Distribution of Funds According to Pre-Rebate Fees

13. 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%

14. 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%

15. Long run fees over assets

16. Long run fees over assets

17. 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