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Swede dreams

Adair Turner’s Pensions Commission appears to have found the Swedish state-run pension scheme to be a smorgasbord of delights but Standard Life head of pensions policy John Lawson warns that the menu does not include advice.

If encouraging people to save for retirement is the Government’s goal, then perhaps its biggest policy mistake has been the introduction of stakeholder pensions. The price cap has left a swathe of potential savers unable to access advice and not trying to provide for their future.

Worryingly, Adair Turner now seems so obsessed with charges that the Government is in danger of making the same mistake again.

When the Pensions Commission published its first report in October 2004, it was clearly keen to cut costs. Talking about stakeholder charges, the report observed that: “At this level, there is a real issue of whether personal pension saving by low-earners is attractive.”

What the report failed to say was that, at this level of charges, no one was prepared to persuade people to save anyway.

In other words, Turner need not have worried about low earners saving in products with unattractive charges, because few people in this income band are saving at all.

Despite the disastrous results of the stakeholder experiment becoming more and more obvious, Turner continues to talk about charges. He cites the Swedish state-run funded defined-contribution scheme. This scheme deducts compulsory contributions of 2.5 per cent of earnings at source and transfers them to a clearing house. Each individual saver directs the clearing house to invest their contribution in one or more of the 700-plus funds available.

The charges in Sweden are 0.3 per cent for administration and between 0.15 and 0.73 per cent as a fund management charge on the 20 most popular funds. This means the Swedish saver pays between 0.45 and 1.03 per cent. This might look superficially attractive compared with stakeholder but there are two crucial differences – the Swedish charges are subsidised by the Swedish taxpayer and do not include any advice cost.

The Premium Pension Authority is the state-owned administrator which runs the Swedish defined-contribution pension scheme. Scrutinising its annual report for 2003, it is apparent that its costs exceed its income. The 0.3 per cent levied on individual accounts is insufficient. In fact, it would need to charge 0.435 per cent just to break even. The Swedish National Debt Office fills the income/ expenditure gap by issuing new government debt.

A similar thing happens at the state-owned default fund manager, known as AP7, which would need to charge 0.193 per cent rather than 0.15 per cent to break even.

After adding the cost of collecting contributions, the true level of charges ranges between 0.658 and 1.195 per cent on the 20 most popular funds. But even this does not allow a fair comparison with UK pension charges. To do that, we need to strip out the cost of advice from personal pension and stakeholder charges. When we do this, we discover that group personal pensions and stakeholder are available from as little as 0.3 per cent and individual personal pensions and stakeholder from around 0.7 per cent. This means the UK already administers pensions more cheaply than Sweden on a comparable basis.

Adding in advice costs, the annual charge on UK pensions usually sits in the range of 1 to 1.5 per cent. This level of charge is more expensive than the true costs of the Swedish system but a valuable extra service is included – advice.

The Swedish system is compulsory, so it is impossible to say how many people would choose to save if it were voluntary and advice not available. I would wager the number would be a lot lower than the 50-odd per cent of the working popula-tion who save here, thanks mainly to the fact that people have been encouraged to save for their retirement.

One damning statistic which exposes Sweden’s no-advice approach is that over 90 per cent of new entrants to the scheme end up in the default fund. The Swedes are debating how they can encourage the public to take more interest in their retirement savings. Looking from over here, the answer seems simple – give them individual advice or, at very least, group presentations. We know this approach encourages saving here, in Australia and the US, so why shouldn’t it work in Sweden? However, the Swedish system does include a lesson for the UK. In Sweden, people only have one pension savings account. In the UK, we pick up a new pension every time we move employment.

As people change jobs more frequently, some people may end up with as many as eight or 10 pensions. Not only is this inefficient but people are also less likely to take an interest in small pension pots. The level of interest shown in retirement savings is likely to rise significantly, as has been found in Australia, when they see their savings mounting up.

Our submission to the Pensions Commission proposed a solution to these problems. This was simply that people should carry their pension account with them throughout their life, just like their bank account.

There are some who think this would be difficult to achieve, suggesting that the cost of building a clearing house would be enormously expensive. This is nonsense. We already have the software that does this. This software extracts information from payroll systems and matches the information with Bacs or direct-debit payments to group pension schemes.

Advisers dealing with group pensions will be familiar with this process. The only additional bit of information that payroll systems would need to collect would be the employee’s preferred provider.

Another protestation against this approach is that the employer would no longer have ownership over “their” scheme, with employees able to choose who they save with. Again, this is a weak objection. If you were an employer and were trying to attract and keep the best staff, what would you offer them? Your “own” scheme offering a choice of half a dozen lack-lustre funds? Or treat them like adults and give them freedom to choose a pension that suits them – with the paid help of a financial adviser, of course?

It will be interesting to see what Turner recommends. Let us hope he has learned that pursuing price does not always result in the desired outcome. The Brits are really quite good at administering pensions cheaply and efficiently and are probably the world champions.

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