Why is everyone copying Sweden’s pension system?
Germany’s pension commission has recently recommended moving to a Swedish pension system, and the Finnish government has appointed an independent expert to explore doing the same thing (Nora Lorek/Bloomberg)
Good morning. The German pensions commission recently published its findings, which have been taken up by the government in Berlin.
This piqued my interest because one of the core recommendations was that Germany should adopt a Swedish-style pension system.
Germany is not alone in considering copying the Swedes. Finland, for example, is also considering it. So why is that?
I asked Constanze Janda, a law professor at the German University of Administrative Sciences Speyer who was also, as it happens, one of the chairs of the German pension commission.
As a reminder, the Swedish system includes a mandatory premium pension component on top of the income pension in which savers can invest their savings in the funds selected by the Swedish Fund Selection Agency. If they do not do so, their savings will be invested in the default fund - the $148bn AP7.
This is the element that Germany is considering copying.
Janda said the benefit of the Swedish system is that it enables savers to start taking responsibility for their own pension provision but within clear guardrails that keep them safe.
She said: “In Germany people are kind of reluctant to invest in funds because we had really bad experiences. People don’t really trust the private sector so most of them will be stuck in the default version - but the younger generation is much more open.
“The Swedish system is popular because it works. Sweden has had experiences, both good and bad, and they learnt from that.
“The perception of Sweden is that it is not like the US, it is a social democratic welfare state, so levels of trust are high.”
The commission has proposed that 18.6 per cent of pensionable income will be paid into the pay-as-you-go pension with 2 per cent going into the capital fund.
Janda said this proportion may change over time, but this might be a question for another commission in a decade or so.
She said: “Germans save a lot of money but they do it in the wrong way. I still have a lot of really old 1980s-style savings stuff. People are very scared of saving into private funds.
“If we have this state driven fund this will change the way of saving and you will hopefully get more financial literacy.”
Finland, for its part, has appointed Samuli Knüpfer, a professor of finance at Aalto University, to examine whether and in what form a Swedish-style premium pension model could be applied in Finland.
Mika Vidlund of the Finnish Centre for Pensions said: “The attraction of the Swedish model lies in its financial robustness, partial funding and investment-based element, but these come with a clearer transfer of risks to individuals and pensioners.
“The premium pension gives individuals freedom to choose how a part of their statutory pension contribution is invested. This has also exposed Swedish households to long-term fund saving and capital-market participation.”
Vidlund agreed that the Finnish system included certain protective measures: for example the fund platform has recently been reformed from an open-entry model to a tender-based model to limit the choice available to savers.
He said: “The experience from Sweden and other countries suggests that if a funded choice-based element were to be considered, protective mechanisms of the kind mentioned above would be essential from the perspective of pension adequacy and saver protection.”
