sou · H7B344 · 2019-11-04 00:00:00 — specifically, this meant that the Authority would give pension savers balanced and objective information that enabled savers to design their portfolios in accordance with financial theory.17 The document also noted that one condition for the long-term success of the premium pension system was that individuals had the ability to make their 12SOU 2005:87, p. 13Govt 2009/10:44 p. (The states, “The inquiry considers...” but the quote is not to be found in SOU 2005:87.) 14Govt 2009/10:44 p. 15Govt 2009/10:44 p. 16Analytical will: 11½ years of the premium pension system and PPA (Analytiskt testamente: 11½ år med premiepensionssystemet och PPM), PPM, 2009. 17Analytical will: 11½ years of the premium pension system and PPM, PPM, p. own rational choices and choose an effective portfolio composition on the basis of their attitude to risk.18 The ministerial memorandum Choices for the premium pension (Vägval Premiepension) (Ds 2013:35) identified certain problem areas and opportunities for improvement in the premium pension system based on the purpose of the pension reform. The memorandum noted that, ultimately, this is a matter of political considerations about the responsibility of the State and the individual for pension outcomes. A clear statement of the objective of the national public pension should, according to the memorandum, be formulated in that decision-making process. This referred to which minimum pensions or compensation levels should be guaranteed by the State and which parts the individual should be personally responsible for.19 However, no specific statements of objectives were presented. The Inquiry behind the report Focus on the premium pension (Fokus Premiepension) (SOU 2016:61) started from the original design of the system with a non-choice solution with a low level of risk. The inquiry chair took this to mean that the aim of the non-choice solution was to have a clear focus on social security.20 In this report the inquiry argues, in common with the report Difficult to navigate? Premium pension savings on the right course, that the legislator must bear in mind that the premium pension is a relatively small part of the national public pension. In terms of the Inquiry’s assessment of what was considered a suitable level of risk in the premium pension, this meant that the level could be relatively high since the income pension makes up a larger part and also corre- sponds to a low-risk investment.21 Partly in the light of the suspected criminal activity aimed at the premium pension system and pension savers, see section 4.4.5, the decided in 2017 to produce an outline of what could be done to change the design without the system losing its pur- pose. In 2017 the Affairs presented a pilot study of possible structural changes for a more 18Analytical will: 11½ years of the premium pension system and PPM, PPM, p. 19Ds 2013:35, p. 20SOU 2016:61, p. 42 (with a reference to Govt 1997/98:151 old-age pension, p. 21SOU 2016:61, p. secure and more efficient premium pension system.22 The pilot study noted that the premium pension did not have an explicit objective. It is therefore not apparent what product and what result should be sought. This means that, in practice, the aim is shaped at govern- ment-agency level.23 The pilot study argues that this is a less appro- priate delegation of authority, as considerations about objectives concern not only returns but also what degree of social security, risk and stability the system should have and how this should relate to other parts of the pension system. According to the pilot study this concerns the foundations of the pension system and should there- fore be a political decision, not a matter for the government agencies.24 The pilot study formulated the following objective-related criteria that it considered should be included in the objective of the premium pension and therefore govern the design of the premium pension system: 25 1.The premium pension is a compulsory social insurance system for which the state has overall responsibility. 2.Investments should prioritise insurance ahead of savings and aim to achieve a stable lifelong pension income. 3.Over time, returns should exceed the income index. 4.For anyone who so wishes, there should be the opportunity to choose from quality-assured options. 5.Risk in the premium pension should not be higher than in occupa- tional pensions. 22Pilot study of possible structural changes for a more secure and more efficient premium pension system (Förstudie om möjliga strukturella förändringar för ett tryggare och mer effektivt premie- pensionssystem) (S2017/03516/SF). 23S2017/03516/SF, p. 24S2017/03516/SF, p. 25S2017/03516/SF, p. objectives been formulated in other funded systems? The absence of statutory objectives as part of funded pension systems is not unique to . However, some countries have formulated mission statements or clarifications of objectives.26 The mission of ’s national pension fund – Pension Plan (CPP) – is described as being: To invest in the best interest of Pension Plan Contributors and beneficiaries and to maximise investment returns without undue risk of loss.27 describes the purpose of the country’s as being: To maximise the Fund’s return over the long run, without undue risk, so as to reduce future ’ tax burden.28 Several other countries formulate their purpose and mission in similar ways, and they have then been interpreted in terms of an objective by a responsible managing body. AP1–4, which make up the buffer fund in the income pension along with AP6, are governed by a generally worded objective for their investment operations in the Act (2000:192):29 AP1–4 shall manage their fund assets so that they are of the greatest possible benefit to the insurance for the income-based old-age pension. The total level of risk in the Funds’ investments shall be low. At a chosen level of risk, the fund assets shall be invested so as to attain a high long-term return. Based on this, the board of each adopts objectives for asset management. The pension systems described above are Pay As You Go (PAYG) systems without any element of individual choice in the direction of their investments. It has evidently been considered in these countries – and in for the income pension system – that relatively vague wording of primary legislation is sufficient to make investments so as to attain a good pension; or the legislator 26SOU 2012:53 in the pension system – more efficient management of the pension reserve (AP-fonderna i pensionssystemet – effektivare förvaltning av pensionsreserven), p. 29Chapter 4, Section 1. has considered that it is not appropriate or even possible to have clearer wording. What discussion has AP7 had about the objective of its asset management? Act30 states the following about the operations of AP7: At a chosen level of risk, the fund assets shall be invested so as to attain a high long-term return. Based on that provision and the mission that the Fund has in the premium pension system, AP7 has formulated a mission, in the follow- ing terms: People who do not want, or are not able, to choose should have at least as good a pension as other people. In 2016 AP7 did work on formulating a supplementary objective in the form of a long-term ambition for returns. This work resulted in the following objective: Long-term savings in AP7 Såfa throughout working life should provide long-term outperformance of 2–3 percentage points per year in relation to the income pension. AP7 considered that the advantages of expressing their objective as outperformance relative the income pension31 were, first, that this relates the mission of the premium pension to the income pension and, second, that it can be applied in practice by savers when making a pension forecast. One guiding principle in work on the ambition for returns was to make use of the legislative history of the Act, which states that risk and return should be interpreted in terms of pensions paid.32 The agency took this to mean that risk-taking in the Fund should be seen from a holistic perspective, in which the premium pension makes up a limited part of the aggregate national public pension. AP7 took the view that the objective, expressed as outper- 30Chapter 5, Section 6 and Chapter 4, Section 1, second paragraph. 31In principle what is meant here is the balance index, i.e. both the income index (change in average income) and the balance ratio (the relationship between assets and pension liability in the income pension). 32The in the reformed pension system (AP-fonden i det reformerade pensionssystemet (Govt 1999/2000:46), p. formance relative the income index, had a strong link to the overall purpose of the premium pension system. AP7 also chose to express an interval for its expected outperfor- mance in order to signal that forecasts of returns are uncertain. The agency also produced a tracking plan for the objective that contains a number of indicators to regularly follow and report each year to the board when the income or balance index for the previous year is adopted. In moving from the competition objective of the mission to an outperformance objective, AP7’s supplementary wording entails a shift of perspective. Instead of starting from the fund marketplace and the choices made there, AP7 starts from the actual purpose of the premium pension: to give an expected equity risk premium by investment in the capital market and to give diversification of risk. Today the competition objective is called the mission and the outper- formance objective the return ambition. However, asset management is based on the outperformance objective. What objectives do the funds in the fund marketplace have? The funds in the fund marketplace also have objectives for their asset management. They are individual objectives for each fund. So, in theory, the number of objectives in the fund marketplace is as large as the number of funds in the fund marketplace. In practice, how- ever, many objectives are very similar or even identical. The objectives of the funds are stated in their fund regulations. The most common objective is to attain a higher than average return in the market the fund is investing in. In some cases, the benchmark is defined in the fund regulations by stating that the return should exceed a specified comparison index. A more unusual alternative, of which there are instances, is for funds to aim for a specific risk level, which can be expressed in terms of volatility. In the case of index funds, the fund regulations have to state that the fund is an index fund and therefore intends to follow a particular index. This is important consumer information at the same time, since index funds have an exemption from the diversification require- ment that follows from the legislation in other cases. can have a more concentrated portfolio in which parts of their hold- ings exceed the statutory restrictions that apply to other funds. Objective of the premium pension system Starting points in terms of reference for the objective As described above, there are several different reasons for having a premium pension system. But no objective has ever been formu- lated. It could be asserted that there is an implicit objective of a higher expected return in the premium pension system than in the income pension system. This is often put forward as an argument for the premium pension and, conversely, the system would pro- bably not have been introduced if a higher return was not expected. Our terms of reference state that an objective need to be formu- lated for the premium pension system and aimed at delivering an expected return that, as at present, clearly exceeds the income index in the long term. They also state that part of our remit is to ensure that the objective of the premium pension system is consistent with the objective of the default option, which has been investigated separately in the ’s review of the default option.33 Our terms of reference also state that the inquiry is to formulate the role of the fund marketplace in achieving the objective of the premium pension system and in creating a choice environment that is reliable and secure and that offers pension savers freedom of choice. The premium pension is a social insurance system The Inquiry’s assessment: The premium pension is a compulsory social insurance system and this should guide the objective of the premium pension system. 33Fi2019/00913/FPM. Reasons for the Inquiry’s assessment Starting points for the Pension Agreement The Pension Agreement states that there is a public interest in people receiving a pension that is possible to live on, and this is why has a compulsory national public pension. The premium pension is part of the national public pension and, as such, part of the social insurance system, for which the State is responsible. The interests of savers and pensioners must always come first. It also states that the agrees that the premium pension system should be maintained, but that the system should be reformed to provide better security and higher future pensions. Its design should have a different basis and a new structure in accordance with a number of principles including the principle that the premium pension is a form of social insurance for which the state must have a clearer responsibility. Social insurance is intended to provide economic security One fundamental part of welfare provision in is a , compulsory and comprehensive social insurance system. It is intended to provide financial security for all insurees in all phases of their lives. One important part of this financial security is the national public old- age pension, which is intended to guarantee reasonable, secure and sufficient income after working life when there are not normally any possibilities of other sources of income. The national public old-age pension is compulsory and is designed as insurance cover that pro- vides insurees with a pension for the rest of their lives, irrespective of how long they live. The premium pension is also part of the national public old-age pension and is therefore also a form of social insurance. One fundamental feature of the premium pension is that, along with the income pension, it is intended to provide protection for insurees’ living standard on retirement on the basis of premiums paid. Against this background, the Inquiry takes the view that it is reasonable for the objective to be proposed by the Inquiry for the premium pension system to be guided by the status of the premium pension as a form of social insurance. In the opinion of the Inquiry, this means that the State has a clear responsibility for the premium pension system being designed so as to be consistent with the objec- tive. In particular, this means taking responsibility for a risk level that provides the possibility of a long-term good return while restricting the risk of strong fluctuations in individuals’ pension amounts. The assets in the income pension and premium pension system have exposure to different markets, the labour market and the capital market, but have the same purpose – to provide financial security in old age through a lifelong income. The lower the variation in this income, the more secure and valuable it is – at the same time as greater security means poorer expected growth. While the premium pension system and the income pension system share the same overall purpose, this does not need to mean that the objectives for their design have to be identical. But an objective of the premium pension system does need to be guided clearly by the fact that it is a form of social insurance. The objective of the premium pension should always be based on delivering as good insurance cover as possible, focusing solely on the interests of savers and pensioners. While other interests can be taken into account, this can only be done to the extent that doing so is not to the disadvantage of savers and pensioners. This means, for instance, that the premium pension system should not be designed to promote growth in the Swedish economy or to serve other economic policy objectives. should it have the purpose of being a distribution or marketing channel for fund managers, acting as a product develop- ment platform for the fund market or serving as a channel for newly started or foreign fund managers wishing to establish a presence in the Swedish fund market. The experience of the premium pension system in recent decades shows that savers seldom behave according to the ideal model for rational consumers. This means that the principle that well-function- ing competition leads to price pressure and product development cannot simply form a starting point for the design of the premium pension system. Therefore, the design of the premium pension system should not be used as a tool to turn competition in the fund market in any particular direction either. The premium pension system can have positive effects on the financial education of the population, but this must never be a main purpose in designing the system. is the purpose of the premium pension system to increase state ownership in or influence on the business sector. What is a responsible level of risk in a social insurance system? In line with other social insurance benefits, the objective of the premium pension system should be guided by the intention of providing financial security. The premium pension system certainly is intended to benefit from an expected higher return from the capital market, so that the premium pension is associated with a risk that could be considered to be inconsistent, to at least some extent, with providing financial security. However, the fund-based saving involved here normally takes place over a very long period of time. In addition, shares have traditionally and in the long term given a higher return, i.e. a return in excess of income growth. This does not, however, mean that this is sure to be the case in the future. Moreover, individual savers in a system with individual freedom of choice can always get a low or volatile premium pension because their choice of funds has resulted in such an outcome. The Inquiry considers that the tension between risk, return and security is unavoidable, but that an acceptable trade-off is possible. However, it is, in the assessment of the Inquiry, important that, at a general level, the objective of the premium pension system is guided by its status as a form of social insurance and that the level of risk during both the saving and the payment period is therefore adjusted so as to limit variation in pension amounts.34 34It could be assumed, in theory, that some individuals making their own choices in the fund marketplace take great risks in the certainty that the State will nevertheless cover losses through housing supplement, for instance. This is usually described as a moral hazard and is used as an argument for limiting risk in the premium pension. In practice, however, the scale of the problem is very small. The share of pensioners receiving housing supplement is relatively limited, around 15 per cent. Factors other than the premium pension are of much greater im- portance for the right to and scale of housing supplement; they include whether the pensioner is single or cohabiting and the size of the pensioner’s income pension and occupational pension and of their assets. The typical recipient of housing supplement is a single woman, aged over 80, who either does not have any premium pension at all or has a premium pension that makes up a marginal part of her pension. Even when the share of premium pension has increased, the overall scale of housing supplement will not be affected particularly strongly by the size of the premium pension. In theory it can also be assumed that sincea higher expected risk leads to a higher return, it is likely that a number of individuals will get a higher premium pension and therefore avoid or receive less housing supplement. So, if any, state expenditure for high risk-taking in the premium pension can probably go in both directions. Part of the background to the point made about the importance of a suitable risk level is that the premium pension is going to in- crease as a share of the national public pension both because the system is still being phased in and because the expected return is higher than the yield on the income pension system. This means that there can be reasons to reduce the risk in the premium pension system as its share of the national public pension grows. Objective of the premium pension system: a good savings product and a secure pension with the right to choose The Inquiry’s proposal: The objective of the premium pension system should be to form a pension saving of high quality that provides a secure pension, which means that: 1.during the saving period give a return that is clearly higher than the change in the income index but without guarantees for the return; and 2.during the payment period deliver a premium pension with low volatility, taking account of the remaining saving period. The premium pension system should provide the right to free- dom of choice so that savers and pensioners are able to influence their risk level and investment approach regarding the invest- ments of the premium pension assets. The objective of the premium pension system and the principle of freedom of choice should be regulated by law. Reasons for the Inquiry’s proposals Saving period: Higher expected return than wage growth The Inquiry considers that the objective of the premium pension system during the saving period needs to contain a level for the return. This applies especially to the asset management for which the State is responsible, i.e. in principle the default option. The premium pension system should also include a right to real freedom of choice for savers and pensioners regarding the investments of the premium As a principle, and since the pension is part of the social insurance system, the objective should therefore also apply to those who choose funds by themselves. Since one intention of having own choices is to actually be able to influence the level of risk, it goes without saying, however, that the likelihood for a result that diverges from the objective is higher for individuals choosing funds on their own. By making use of their right to freedom of choice, these individ- uals set their own objectives for the premium pension. One natural starting point for a good savings product for the premium pension is a minimum return limit at the income index.35 If the return target is set lower, with the result that the return risks being lower than or equal to the income index for long periods, this nullifies the main economic reason for having a premium reserve system at all. So a minimum objective should be an expected return higher than the income index. However, the Inquiry considers that such a return objective is far too low. An investment that is associated with risk ought to provide a clear risk premium in the long term. Instead, the objective should there- fore be formulated as saying that the return should clearly exceeds the income index, as is also stated in the Pension Agreement.36 Historically the return on investments in the capital market has, in fact, considerably exceeded income growth.37 While this is no guar- anteed for the future, and long-term poor performance can never be ruled out, an objective for returns should not be set too cautiously. The objective should be seen as a threshold objective, a benchmark, that should not be fallen below over a business cycle and should never be fallen below in a complete saving period. However, it will not be possible to give a guarantee for the return.