Communicating The Fundamentals In Sweden
By: Ann-Kathrin Halvorsen
When Sweden decided to reform its pension system in the early 1990s, it decided to use a means-tested base and a top portion made up of a notional Defined Contribution element and a smaller pure DC segment. Ann-Kathrin Halvorsen looks at some of the communications challenges this presented.
The pension debate has been raging in the western world for a number of years now. We are all familiar with the challenges of an aging population: looming benefit cuts and increased taxes.
Sweden is no exception and it started to put serious reform alternatives on the table in the early 1990s. It decided on a state pension system consisting of a meanstested base and a top portion made up of a notional Defined Contribution element and a smaller pure DC segment. This article will focus on the pure DC portion of the system and look at the communications challenges that exist when dealing with a national plan and a large, heterogeneous participant-pool.
So, how does the plan work? The DC plan consists of personal pre-funded accounts where investment decisions rest with the participants and contributions are mandatory. It’s your classic DC plan. A relatively low percentage, 2.5 per cent, of a person’s salary and other taxable benefits are diverted into the accounts. Contributions are made annually and administered by PPM, a governmental agency established to handle the personal savings accounts. PPM also handles all communications. Participants have a long list of funds to choose from, but can only select up to five investments.
The system has a unique beneficiary angle. Account balances that remain in the system after a participant’s death are distributed among active participants. A participant can, however, designate his or her spouse or registered partner as a beneficiary, but such a designation will result in lower monthly benefit payments.
Five years have passed since the first contributions were invested and the effects are starting to appear. The system got off to a rocky start with both IT issues and stock market bubbles bursting on both sides of the Atlantic. The IT woes have now been solved and the stock market bears seem to be retreating.
The administration of the plan also seems to be running smoothly. The PPM staff has grown to 200 and is establishing efficient routines internally and with other governmental agencies. The challenge ahead is to create the needed level of pension understanding among Swedes along with a strong sense of ownership and excitement about the system.
What’s the communication status today?
PPM utilizes several different communication channels. Its website, along with annual account statements and information packages, form the core of the strategy, but traditional advertising media such as TV, magazines, and billboards are also used.
Unfortunately, the current communication strategy has not proven to be very successful. Market statistics tell the true story. According to PPM’s own market research from 2004, only 22 per cent of first-time contributors can adequately describe a DCbased pension. This figure increases to 42 per cent when all PPM participants are considered. Just under half of all participants feel that they have sufficient knowledge to handle their PPM investments.
This lack of understanding is clearly reflected in actual investment behaviour. At the end of 2004, 65 per cent of the market value of the entire PPM pool was invested in the default fund. On the bright side, the default fund is a medium risk global equity investment which is partly actively managed and partly indexed. Consequently, non-choosers are not stuck with a low-risk, low-yield investment.
As mentioned, the information package sent to first-time contributors is an important part of PPM’s communication strategy. Unfortunately, last year 20 per cent of firsttime contributors reported they did not receive the package and a whopping 42 per cent of the people who did receive it, did not bother to read the information (PPM 2004 Annual Market Research).
700 Funds Available
Part of the problem may be the large fund directory that is included in the introductory package. The directory is essentially a book listing all of the almost 700 funds available to participants.
What can be improved?
PPM’s communication strategy has clearly proven to be lacking. There are, however, some simple things that PPM can do to make their information efforts simpler and more focused.
- Reduce the number of available investments
The overwhelming number of funds available should be reduced drastically. PPM is already considering a sweeping reduction and a decision will be made in the fall of 2005. Such a reduced list should contain a number of so-called ‘generation funds’ or ‘lifestyle funds.’ A person could then simply select his or her generation or lifestyle and the fund manager would take it from there. These types of funds are already available in PPM, but are easily lost among the vast list of investments offered.
- Provide better web tools
It is important to provide the right tools for participants to actively plan their financial future. The PPM website contains general information about the funds and the plan itself. It also allows you to log into your account to make changes or view your transactions. However, a retirement calculator or a simulation tool is missing altogether. Such a tool should be incorporated into the website allowing participants to play around with different investment scenarios and immediately see the future effects. This would help the many young participants who feel making active investment choices is a waste of time as the annual contributions are too small. The value of time would be apparent in such a tool. PPM should also provide simple tools allowing participants to determine their investment profile based on, for example, age, investment knowledge, and risk tolerance. The profile could even be tied to the selection of the ‘generation funds’ or ‘lifestyle funds.’
These two simple improvements will help PPM’s communication efforts by making them more focused. They will also make the investment decision process less daunting for participants. However, the underlying problem is the lack of a fundamental understanding of financial planning. PPM may be airing TV commercials emphasizing the importance of making active investment choices, but these commercials don’t provide people with the tools or education needed to actually make these important investment choices. Swedes know it’s important to make an active PPM investment choice; they just don’t know how. Long-term strategies must be implemented in order to get to the heart of the problem. These strategies need to include the national educational system, a strong base of financial advisors in the private sector, and active involvement by employers and organizations.
The national education system seems to be the obvious place to start preparing future PPM investors. Sweden is in a good position to make this happen with a small population of nine million and a relatively centralized curriculum. This will provide the next generations of responsible investors with a strong base from which to make sound financial decisions. Nevertheless, there will always be a demand for professional advisors in a DC-centered pension system.
Market statistics from PPM show that this is the case in Sweden. Currently, the main source for PPM guidance is family members and many state that access to personal advisors is desired. PPM does offer lecturers who will visit employers and organizations to talk about pensions and investments, but PPM can’t handle this alone.
The private sector is responding. There are an increasing number of independent financial advisors that will recommend an investment strategy and even make fund changes directly in a participant’s PPM account. These private solutions are more flexible than PPM and can provide the personal angle that is very much sought after.
Employers and other organizations can also play an important role. Unfortunately, Swedish employers lack a strong tradition of benefit communications. Employer sponsored retirement plans are common, but communication of these paternal Defined Benefit (DB) plans has been virtually non-existent when compared to North American standards.
Things are changing, however. More and more DB employer sponsored plans are being converted to DC. That means employers and the strong labour unions in Sweden should pay more attention to the financial welfare of their employees/members. Employers and organizations offer great venues for financial education sessions and, thanks to their smaller participant pools, can provide personal and differentiated communication materials more efficiently than a national and centralized organization.
A DC-based pension system seems to be the clear solution for many nations with rapidly aging populations. Such a system offers advantages such as full funding and personal flexibility, but it also has its drawbacks. The real challenge is communication. Unfortunately, there is no quick fix for plans that cover a large and heterogeneous population such as a national retirement system. Citizens need to be equipped with the fundamental building blocks of financial planning. This takes time and should be incorporated into the educational system.
Employers and other organizations can also play an important part by serving as venues for educators and lecturers. Personal guidance also needs to play an important part in the communication strategy. This should come from the private sector (banks and other financial advisors). Sweden’s PPM is waking up to these facts and is now considering long-term communication strategies that will shore up the system. The DC future in Sweden has potential.
Ann-Kathrin Halvorsen is a benefits professional with experience in both the U.S. and Sweden.
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