European countries are showing interest in the reforms instituted in Sweden's highly regarded pension system.
"I certainly do think this would be effective for other (European) countries," said Po Ost, head of institutional investment management for Carlsson Investment Management, Stockholm. "I think this is the way to go forward to fund larger and larger parts of pension liabilities. I hope countries in the Western world take it as a role model."
Hans Jacobson, director of the Premiepensionsmyndigheten, the 93.4 billion Swedish kroner ($9 billion) defined contribution portion of the new system, said he has had officials from Western Europe and Eastern Europe talk to him about the new Swedish state pension plan.
"The (Swedish) system is very good," said Simon Barrett, director of the Copenhagen office for Dresdner RCM. "It could be a blueprint for other countries to follow."
What Sweden changed
What Sweden did two years ago was change its state pension system to incorporate elements of both defined benefit and defined contribution plans. Employers pay 18.5% of an employee's salary into the fund for future pension liabilities; 16% goes into the defined benefit pay-as-you-go system and the remaining 2.5% goes into the PPM. Employees can direct their PPM money into a choice of 500 mutual funds. The return earned from these investments depends on performance of the mutual funds selected.
If an employee does not want to pick a mutual fund, the money goes into a default account, AP 7, which invests the money for them. So far, the assets of about one-third of employees are in the default account.
The defined benefit assets are divided into four funds - AP1, AP2, AP3 and AP4 - which are balanced funds split about 60% in equities and 40% in fixed income.
The idea behind the reform was to create four funds - each starting with 134 billion kroner -to make it easier to manage assets. One megafund "would have been too large for the domestic market," according Lars Gavelin, a special adviser to Sweden's ministry of finance.
"There's less risk if you have four independent decision-makers," he said. "If you only have one fund and the decisions are bad, you have more problems. That's why diversification is good," he added.
There is also AP6, which is smaller (16.7 billion kroner) than the other four and has a mandate to invest in private equity investments, said Mr. Gavelin. The fund has about one-third of assets in private equity. "It will be fully invested in private equity at some point," said Mr. Gavelin.
The four main AP funds officially began investing activities on Jan. 1, 2001 and just reported their results for the year. AP1 returned -5.6%, which was 70 basis points ahead of its benchmark; AP2 had a return of -3.7%, vs. -5.4% for its benchmark; AP 3 had -4.2% return on its liquid portfolio, excluding its real estate investments, which had a -4.4% return. AP3's benchmark was down 4.6%. AP4 had returned -5%, vs. the -4.5% of its benchmark.
AP 7, the default fund, outperformed its benchmark by 2.5 percentage points, according to Richard Grottheim, executive vice president of AP 7. About 92% of AP 7 is invested in equities, with the rest in fixed-income. It is invested "quite aggressively" in a large variety of mutual funds including global, emerging markets and Swedish equities, said Mr. Grottheim.
Each of the AP funds is run by a separate board that sets the objectives and benchmarks of the funds
"The AP funds are evaluated against the targets of the boards - not each other," added Mr. Gavelin.
He said Swedish authorities wanted the four funds to be independent of each other and independently managed.
The PPM's Mr. Jacobson said he thought Swedish individuals "made sound, stable choices," when they selected the mutual funds in which to invest their defined contribution assets. They were allowed to pick up to five funds from the universe of 500.
Mr. Jacobson said investors followed the advice to spread their risk and invest in several different funds - the average investor chose 3.5 mutual funds - and to invest for the long term.
He said that U.S.-style lifecycle funds, known as generation funds in Sweden, have been very popular. "They got the largest portion of the investments, about 50% of the average investor's money," said Mr. Jacobson. The high-risk funds, such as those that invest in Eastern Europe and technology, got about 20% of the money.