Sweden and the move in pension system

Transcription

1 Sweden and the move in pension system Utrecht, May 31st Lars Engström Product and business development, digital

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4 State pension from DB 1960 to 100 % DC

5 The history of Swedish pension Pension to soldiers Minimum pension to all swedes Additional DB based state pension, occupational DB based pension for public & private Occupational pension revised DC for younger employees. Older remain fully or partly with DB 17 th century The first government pension were established New rules based on gender Revised State pension transfer from DB to DC Process started 1984 and was implemented

6 Sweden s new state pension system Fee determined you get what you pay for Fixed fee All generations pays the same (16 % + 2,5 %) Your total life income will determine your pension Guarantee pension, taxes and right to pension for unemployed and invalid people Possibility to retire at 61 Financially stable (balancing) follows the changes in national income/wages Politically stable (wide political agreement)

7 Occupational Pension

8 Public sector Private sector Occupational: DC for younger employees, older remain fully or partly with DB Collective labour & pension agreements Blue collars - DC 100 % White Collars - DC 100 % for all born 1979 or later, DB for all born 1978 or earlier No collective agreements Blue & White collars - DC 100 % or no occupational pension schemes Municipal and County council employees DC 100 % for all born 1986 or later For those born 1985 or earlier: DC 100 % on salary up to up to 4,000/m and DB above Government employees DC 100 % for all born 1988 or later For those born within 1973 to 1987: DC 100 % on salary up to up to 4,000/m and DB above

9 Why did it make sense for employers to switch to DC? DB has a some inherent conflicts Corporate purpose description does not include fund management of employees' pension capital Financial accounting standard (risk control) implies that pension liabilities should be valued in line with long bonds, implying a low incentive to reach higher returns Assuming that higher risk yields higher returns over time, employees can reach a similar or better outcome with lower pension costs from the employer with DC while DC offers a range of advantages More focus on core operations Possibility to lower pension related costs Higher predictability for pension related costs Easier for employees to understand the value of pension contributions from employer Higher flexibility in work force with no discrete age requirements

10 What was the implications for the individuals? Lots of upside for the individual One size fits all not optimal for everyone Possibility to take risk implies higher upside Guarantee products can still offer DB equivalent with the same type of predictability Greater financial flexibility to use contribution for e.g. survivor protection and other risk insurances and work life flexibility with no discrete age requirements Higher engagement and thereby better preparation for retirement but also a transfer of the risk Variance in options means variance in outcomes, and a need to minimize the risk of making bad decisions leading to low pension outcomes Human behavior is in general not made for financial markets (buy in up-markets, sell in down-markets) Any lack of low cost products will affect the individual directly Advisors with sub-par quality or bad intentions might give bad recommendations

11 Only the individual can decide what risk he or she wants to take, but good advice ensure that the decision is based on the best possible facts and assessments Two essential perspectives to be taken into consideration 1 2 Risk capacity Risk tolerance / willingness Assessment based on the facts, e.g. financial situation Assessment of the individual s personal attitudes towards risk Generally difficult to perform by an advisor without system support Many ways of assessing, but research and industry best practice exists

12 Swedish example: Large variance in preferences across both age and income groups Chosen risk by age Chosen risk by income 100% 100% 80% 80% Mycket hög risk 60% 40% 20% Very high risk High risk Medium risk Low risk Very low risk 60% 40% 20% Hög risk Medelrisk Låg risk Mycket låg risk 0% % > k 27-52k 52-77k k >102k Very few decide on a low risk investment, implying that most benefit from having the choice Source: Söderberg & Partners advisory sessions in

13 Key learnings from the Swedish transition Day 1 requirements: Necessities for a well functioning setup Access to high quality advise and/or guidance, with extensive documentation requirements to ensure accountability and traceability Default choices still important for those who do not want to engage at all in their pension Continous improvements: The DC offering grows better with time Market forces help by effectively weeding out expensive and/or bad products Advisors who act in an industry based on trust where only serious actors will survive Strong negotiators (e.g. unions), ensuring that the new agreements are appropriate

14 Thank you!