Skandia, the Swedish insurance and financial services provider, would like to see an overhaul of the Swedish occupational pension system ITP, starting with an independent review.
Mattias Munter, pension economist at Skandia, said an independent review would give valuable perspectives on how to develop the system to make it even better for pension savers, business and society.
In its recent report on reforming the ITP system, Skandia indicated it would like the review to look into the transparency in the system, particularly on how the pension insurance products are procured. It would also like an appraisal of the risks involved with only having one default option – in this case Alecta, the pension insurer that lost $2bn by investing in failing US banks hit by increasing interest rates – as well as moving away from the current procured system to an open registration fund market platform.
Munter said the low percentage of savers that make an active selection and end up in the default option increases capital concentration and risk, arguing that a fund market platform would make the system more sustainable over the longer term.
“As far as the interest of the pension savers is concerned, it should be in everyone’s interest that more active choices are made and this means that pension savers feel satisfied with the default option. There will always be those who do not want to choose at all and therefore the design of a default alternative needs to be done in a wise way both from an asset management and an insurance perspective. Here we see that there is potential for improvement within ITP,” he continued.
“One solution to improve the risk spread of the capital coming from those that do not make an active choice, which we highlight in our report, is to have several companies that accept these customers,” he added.
This move way from procurement would be the opposite to the reform of the national premium pension system (PPM) which saw the creation of Fondtorgsnämnden (FTN), which now oversees the professional procurement process of the funds in the system.
Some argue it raises the quality of the selectable funds available and reduces the risk of unscrupulous players and fraud, which marred the system before the reforms.
Munter, however, stated that moving away from the procured system in ITP pension “would be in line with that in other comparable occupational pension systems, i.e. collectively agreed occupational pensions for other groups”.
He said: “In the report, we note that ITP remains alone among the large agreements with the use of procurement. There is no doubt that the quality and security can work at least as well in a system that uses an open fund platform.”
Munter said the national premium pension system is a different matter and that “even there, there are different opinions about which design best benefits pension savers”.
Among the most vocal critics of the PPM reform has been the Swedish Investment Fund Association, which has argued that a procured system infringes on individual choice and moves away from Swedish providers, hurting the country’s capital markets.
Munter further said that while there are lessons to be learnt from the national system there are many other options to learn from as well and argued that it is a question of balancing the resources and competences needed in the administration of the procurement process and what in the end is most beneficial to the pension savers.
“The model used for ITP today has led to an alignment of the product range that makes freedom of choice less relevant for the individual going forward. And that at the same time when all risk has been shifting from the employer to the individual,” he added.
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