Pensions around the world blog series: Sweden

If you have ever wondered why workplace pension schemes frequently offer limited investment choice and focus on the default fund, the answer is jam, and Sweden.

In setting up pension systems both policymakers and pension schemes looked extensively at both the behavioural economics literature. They tended to take in both experimental and real-world studies. Sheena Iyengar’s work on choice showed that in both a retail environment (the sale of jam) and in pension plan design, offering many choices could discourage people from making a choice. In some cases, with US 401k plans, where investment choice could be a mandatory part of plan design, having to make a choice could put people off joining a pension scheme altogether. These studies are one of the reasons why schemes frequently offer a focused range of funds, in contrast to retail platform providers. From the way newer SIPP consolidators are put together, it looks like they’ve been reading the same papers too.

Investment choice for pension savers was initially encouraged

Sweden, meanwhile, is one of the only countries that has deliberately encouraged investment choice in DC. The experiment went badly but did so in a very informative manner. The bulk of Swedish state pension entitlement is a notional DC scheme, run on a pay as you go basis, funded out of taxation. There is a smaller top up scheme, called PPM, which is a funded DC.

At its launch in 2000, the Swedish government not only allowed but encouraged investment choice in the scheme through a nationwide advertising campaign. 456 funds were offered through PPM and 66.8% of those who started saving into PPM in 2000 made an elective investment choice and chose not to use AP7, the default fund.

Outcomes for this group of self-selectors was materially worse. They tended to overweight Swedish stocks and tech stocks (during the end of the dotcom bubble) and critically, tended not to rebalance their portfolios over time. Investors in the AP7 default fund, meanwhile, received better outcomes.

Self-selection of funds was not a success

This case study has been so impactful that it is hard to think of another national DC system that has followed the Swedish route. Indeed, Sweden no longer encourages choice in the same way and has progressively shrunk the number of funds available to PPM savers.

Henrik Cronqvist and Richard Thaler, who wrote the best-known evaluation of PPM in 2004 were implicitly critical of its initial design. But their more recent work also looks at the permanence of nudges in the Swedish system. Essentially, under some circumstances, once people have been “nudged” by a pension system to do something – or not do it – that decision is quite often very long lasting.

Their more recent work shows how PPM investors tend not to react when major events happen that might affect their investments. In 2011 AP7, the PPM default fund, started using leverage in the form of total return swaps. This resulted in much higher returns but also meant that investors were taking much greater risks. This massive change in the risk profile of the fund people had been nudged into, had very little impact on investor behaviour.

Why nudging savers has its limits

They observed something similar with the Allra fraud, which unfolded in Sweden in 2017. Allra, operated a fund in the PPM system. It routed transactions through Malta, where it skimmed the transactions in the process. From a mechanical perspective, there is nothing particularly interesting about this. But from a human perspective, what’s interesting is the under-reaction by Allra’s investors. In the week after the fraud allegations came to light, only 1.4% of the fund’s investors divested. This rose to 16.5% when the fund’s auditor resigned.

PPM continues to provide actionable insights about the risks of encouraging choice and information about how to structure choices when thinking about the design of DC pension funds. Increasingly, it also provides insights about the strengths and weaknesses of policies based on “nudging” people and the responsibilities that attach to policymakers, providers and regulators once someone has been “nudged”. It remains a system to watch for anyone interested in the future of UK DC.

More than half of UK households aren’t saving enough for retirement

More than half of households in the UK aren’t saving enough to maintain their work life living standard in retirement, finds new analysis from the Pensions Policy Institute (PPI) and B&CE, provider of The People’s Pension1, which provides workplace pensions to almost 6 million people across the UK.

Giving evidence to the Work and Pensions Select Committee today (Wednesday, April 27th), the director of policy for B&CE, Phil Brown, said that their initial findings, using data from the latest Wealth and Assets Survey2, show that 54 per cent of households and 57 per cent of individuals have not saved enough and are not saving enough, to meet the replacement rates3 set by the Pension Commission in 2004.

The new analysis suggests that while the first ten years of auto-enrolment have successfully reversed the decline in workplace pension saving in the UK, a pension adequacy problem remains. The current minimum contributions of 8 per cent, with a minimum 3 per cent contribution from employers, are not sufficient to provide adequate incomes in retirement.

The full findings of the report will be published in early Summer, but B&CE revealed that even if you take additional capital and housing into account, more than a third of households and individuals still won’t have enough to maintain their current standard of living.

Commenting, Phil Brown, said:

“Automatic enrolment is a success story that has reversed the decline in workplace pension saving across the UK, but the reality is that people still aren’t saving enough. At a time when the cost-of-living crisis is worsening and people are dealing with difficult financial decisions every day, the UK faces a tough choice.”

“Whilst it wouldn’t be right to raise saving rates in the current economic climate, we can’t ignore that people are not saving enough to live on in retirement. This year, as auto-enrolment turns 10, it’s time to renew conversation about how automatic enrolment should evolve once the cost-of-living crisis has abated, to ensure it reaches its full potential. It’s our role to provide evidence but politicians, trade unions and employers need to take the lead.”

Lucy Davies, 36, lives with her husband and son in Southsea, Hampshire, where she works as a part-time gallery assistant, alongside running her own calligraphy business. Contributing the minimum to her pension, she’s concerned she won’t have enough to live on when she stops working.

“It’s so difficult. I know saving for the future is important, but the reality is that I have bills to pay now – bills that are only increasing. Childcare alone is a huge monthly outgoing so contributing any more than the minimum isn’t an option for me at the moment. It’s easy to put off thinking that far in the future, but if I’m honest, right now, I’m not sure I can see a point where we’ll be able to afford to completely stop working.” 


Pensions around the world blog series: USA

Like many things we take for granted, automatic enrolment was popularised in the USA.

Auto-enrolment’s origins across the Atlantic stems from attempts by large, paternalistic employers to drive up participation in their retirement savings plans. These attempts were studied by behavioural economists like Richard Thaler and David Laibson. In the UK, the Department for Work and Pensions and the Pensions Commission picked up on their research on automatic enrolment and saw in it a mid-way between compelling people to save and more laissez-faire approaches to workplace pension reform.

While the US devised and popularised automatic enrolment, it is not actually that commonplace as an enrolment technique. This reflects one of the stranger aspects of the UK’s Magpie relationship with US politics and policy. Not all of the things that we borrow are as successful or widespread in the country of origin, as they turn out to be in the UK.

Half of Americans over 55 don’t have pension savings

There are many factors at play here; as with the UK, a worrying number of Americans have nothing saved for retirement. According to a 2019 study by the US Government Accountability Office, roughly half of Americans over the age of 55 have nothing saved for retirement. But, they are in a better position than Britons.

The US first pillar pension, commonly known as social security, is much more generous than state pension arrangements in the UK.

Social security is earnings related and the average amount paid to individuals in 2022 was $1,657 per month or $19,884 per annum with a theoretical maximum for high earners of just over $40,000. Notwithstanding the fact that there is now more being paid out from the notional social security trust funds in benefits than there is coming in in payroll taxes, social security has been remarkably resistant to reform.

This means that while the first pillar will not afford American retirees a luxurious retirement, support given to almost all retired American workers is, for the most part, well in excess of that provided by the UK’s state pension. Second pillar savings are, obviously, highly desirable but the base level of support provided by social security is much greater.

No nation-wide AE for Americans

There have been successive attempts to roll out automatic enrolment at a federal level, which have not met with success. Meanwhile a variety of states have brought in variations of automatic enrolment at the state level. Illinois was the first to bring in its programme in 2015, followed by Oregon, California, Connecticut, Maryland, New Jersey and Virginia. Pennsylvania and Hawaii are currently considering the issue. While there has been some bi-partisan support for automatic enrolment, both at a state and at a federal level, these states are predominantly wealthier than average and lean Democrat.

At the federal level, last autumn, all the proposals in the Biden administration’s flagship Build Back Better bill were removed from the bill’s framework. Those included proposals to require established employers with more than six workers to begin automatically enrolling employees into either individual retirement accounts. In some ways, this is emblematic of slow progress at the federal level.

An important year for US pension savers (possibly)

2022 could, potentially, be the year this changes. HR 2954, dubbed the SECURE Act 2.0, which is currently in front of Congress, contains provisions intended to mandate that businesses of more than 10 employees, which have been trading for more than three years automatically enrol their workers in a retirement plan. The initial contribution rate is 3% of pre-tax earnings but this escalates automatically by 1% every year to a minimum of 10% and a maximum of 15%. Individuals can select a different contribution rate if they want.

We are watching this with interest. There have been many attempts to bring in significant reform of workplace retirement saving at the federal level, but none have yet succeeded.

That alone tempers enthusiasm in the experiment. But the provisions on automatic escalation are interesting and, should they work wholesale, could provide an example for the UK to follow. It would be a pleasing development if the nation that pioneered automatic enrolment managed to extend its benefits to the bulk of its own citizens.

Mandatory single charging structure could cost membership millions, warns The People’s Pension

The membership of one of the UK’s largest workplace pension schemes could miss out on millions of pounds, with many individual savers potentially losing thousands from their pension pots, if the Government bans auto-enrolment pension providers from using combination charging structures.

B&CE1, provider of The People’s Pension2, has issued this stark warning ahead of anticipated proposals by the Department for Work and Pensions3 which could see all auto-enrolment pension providers forced to introduce a single, flat annual management charging structure.    

The not-for-profit scheme, which provides auto-enrolment pensions to more than five million workers across the UK, uses a combination charging structure to give money back to its members the more they save.

Its charging structure consists of three components:

  • an annual charge of £2.50 – equivalent to 21p a month
  • a management charge of 0.5% of the value of a member’s pension pot each year
  • a rebate on the management charge, giving back between 0.1% on savings over £3,000 and 0.3% on savings over £50,0004

Already, The People’s Pension gives more than a million pounds back to its members every month. As automatic enrolment matures, the number of people benefiting from the rebate on the management charge will grow considerably as will the amount given back, with its total membership projected, based on current calculations, to receive around £34.5 million a year in just five years’ time.

Based on the current combination charging structure, the average earner, saving over their working life with The People’s Pension, could see their lifetime annual management charge eventually fall by more than half to just 0.23%.

But if the Government makes this anticipated move, the pension provider has warned that a saver like this, could potentially lose out on almost £27,000 – around an additional three years’ retirement income.5  

The pension provider has also warned that implementing a universal charging structure only for automatic enrolment pension providers could distort the market, put millions of people saving through auto-enrolment at a disadvantage, and cause pension providers to increase their charges for all members.

Patrick Heath-Lay, CEO of B&CE, said:

“As a not-for-profit organisation, the rebate is an example of how we’re using the money we make to directly benefit our members, helping them to save thousands more towards their future.

“We believe that banning combination charging structures like ours would be a backwards step as it will remove incentives for saving more towards retirement and will unfairly target savers in workplace pension schemes.

“We’re very proud of the fact that we already give back £1 million a month – a figure only set to increase – and we think that it’s only fair to our members that we’re able to continue to do so in the future.”


Savers are at risk of losing out if Value For Money framework is not included on pension dashboards

B&CE, provider of The People’s Pension1 which serves 1 in 6 workers across the UK, has warned that savers are at risk of losing out if the proposed Value For Money (VFM) framework is not included on pension dashboards.

New research2 from the leading pension provider has found that more than two out of five pension holders (43%) are likely to move their savings from one pension provider to another if they could do so via a website that allowed them to see all their pensions in one place. But more than four in 10 (45%) wouldn’t know what to look for when switching pension providers, which risks them making a decision which could lead to a poorer retirement outcome.

When asked what would influence their decision if choosing to move providers, more than a third of pension savers (36%) said saving money on charges would be a factor, 34 per cent would be swayed by the rate of return promoted by the pension fund, and more than one in 10 (12%) would consider moving to a company with a better website or app.

Following the recent launch of the Government’s consultation of the draft Pension Dashboards Regulations3, B&CE believes that the Value For Money Framework4, currently in development by the FCA and TPR, should be included on pension dashboards to ensure savers have transparent and comparable information before making a decision. It is also calling for the new VFM regulations to be applied to the retail market as well as workplace pensions, following research from The Pensions Policy Institute (PPI) which found a significant charging gap between members of uncapped retail schemes and capped master trusts5.

Commenting on the research findings, Phil Brown, director of policy at B&CE, provider of The People’s Pension, said:

“The Government’s recent announcement detailing further regulations for pension dashboards will allow the industry to take the next big step towards making this hugely important innovation a reality. Our research shows that seeing all their pensions in one place may make it more likely for savers to transfer their savings to one provider, but they have little idea of what to look for to make the best decision for them.

“It’s vital for the FCA and TPR’s Value For Money framework to be clearly displayed on the platform, otherwise savers will not know for sure what’s the right move for them. Pension dashboards have the potential to revolutionise pension saving but this will only happen if consumers are provided with complete transparency.”


Why the UK pensions market could learn from Australia

This Australia Day, we take learnings from Down Under and look at how UK pensions could benefit from the advancement of the country’s superannuation system.

This is highly relevant to the UK because the Australian Superannuation system is roughly 10 years ahead of the UK in its DC journey and policymakers often, but not always, look to Australia for inspiration.

The Your Future, Your Super policy package follows on from a series of inquiries into the performance of the Superannuation system. These, especially the final report of the Productivity Commission, made serious criticisms of parts of the Super system and have forced a heavyweight response from the Australian government.

The performance element of Your Future, Your Super, implemented last year, subjects funds to a pass/fail test based on investment performance. The regulator (APRA) examines 7 years (changing to 8 from 2022) of a registerable superannuation entity’s (RSE) investment performance and compares it to a benchmark portfolio. The benchmark is put together using the RSE’s asset allocation and a series of benchmark indices for each asset class.

If the RSE’s performance is more than 0.50 per cent lower than the benchmark, then it fails the performance test. If the annual test is failed more than two years in a row, then the RSE is banned from accepting new business into the product. This strongly incentivises “failing” funds to merge.

Australia’s Superannuation was already consolidating rapidly ahead of this regime coming into effect. Some analysts expect further consolidation and a dramatic shrinking of the market to far fewer funds. We see that as likely but are cautious about estimating how may funds Australians may have to choose from.

Value for money is key

There are both positives and negatives from this for the UK. We think the main lesson for the UK is that if the regulator, in this instance TPR backed by the Department for Work and Pensions (DWP), wants to increase the pace of consolidation in workplace DC then binding value for money tests are one way to achieve this. The current approach UK to driving consolidation based on value for money is focused on DC smaller schemes and allows trustees of the schemes in scope much more discretion in compliance than the Australian version.

One potential outcome of the recent TPR/FCA consultation on value for money metrics would be the strengthening of this regime and its application to more schemes. The Australian audit applies to all regulated funds, not just smaller ones.

Too much focus on past performance can be a negative

We do, though, see negatives to the Australian approach. The approach focuses only on past performance. There are two problems with this. First, past performance is not a good guide to the future. Poor past performance tends to persist while good performance may not. This limits its use as a decision-making criterion, even for regulators and professionals. The real value in a pension scheme is driven by the decision making around a scheme’s default fund, which is impossible to capture quantitatively. But it is also the key thing you would want to understand if you were trying to judge which funds are more likely to show value for money over the long term.

Second, performance next to a reference portfolio creates quirks. A conservative fund might outperform its benchmark and pass the test. A more aggressive fund might outperform the conservative fund but underperform its benchmark and find itself, effectively, out of business.

We look forward to seeing how a tougher value for money regime plays out in Australia and whether a consolidated market really delivers the benefits promised.

Why an overhaul of annual statements is the first step towards better disclosure of information

More than three years on, the 2017 review of automatic enrolment is beginning to have an impact on the sector.

The Department for Work and Pensions (DWP) remains committed to the main proposals in the medium to long term: removing the lower qualifying earnings band and lowering the age threshold to 18 but we expect these in a future Pensions Bill. They seem to have been justifiably delayed by the fallout from the pandemic. However, the Government has chosen to force the pace on the main proposal from the review’s engagement strand, the simplified annual statement.

This simplified annual statement is a standardised annual statement. It covers two pages and is designed to show the information required by law to be in a statement in a way that enables comparison between different schemes.

End the use of jargon

Between the end of 2017 and autumn last year, the Pensions Minister Guy Opperman and the DWP tried to encourage the industry to adopt the simplified statement, with the former expressing his disapproval at ‘jargon-filled, confusing statements’.

While a few providers have adopted the new document, most have stuck with their original statement. More than a year ago, the DWP consulted on the way forward and published its response earlier this year, which served to underline how the department has lost patience and is now looking to mandate the statement, meaning that providers will be compelled to introduce it.

So how has it come to this? Providers have three main reasons for not adopting the statement. Firstly, statement overhaul is regarded as being too expensive. One of the major life houses completed a full revision of its statement recently at considerable cost. It’s hard to make a case for putting the statement up on bricks again so soon after completing a major revision of product documentation.

Secondly, some companies have expressed concern over the quality of the simplified statement. Innovation is increasingly a feature of our industry and there’s an increasing move towards online and video communication of core pensions information and there are some who believe that the way they do things now has advantages over the simplified statement.

The introduction of dashboards

Lastly, there are pensions dashboards, which are likely now to go live from 2023 and will allow people to see their pensions entitlements together on one online portal. With high levels of internet access now throughout the UK population, it seems probable that dashboards will replace both paper and electronic statements as the main way that people get information about their pensions.

Dashboards have the potential to completely reshape the way that people interact with their pensions and may render current approaches to communications with members redundant. An obvious question to ask would be ‘why do you need a paper or electronic statement if you can just look up the relevant information online with a few key strokes?’ with the follow up of ‘when did you last look at a paper bank statement?’ What really needs to be considered with the introduction of dashboards is a full review of all the information we, as an industry, share with pension savers, not just annual statements, and when that information is released. Instead of sending an individual annual statement, why not point them at a dashboard so they can see all of their pensions in one place?

We’re now waiting for the DWP to bring forward a new consultation paper on the simplified statement and this could in turn be followed by regulations which might mandate them.

This should prompt more debate, not only about the adoption of the statements, but also about the disclosure of pensions information more generally. Hopefully the new consultation could result in improved annual statements becoming a stepping stone to improving the way that the pensions industry communicates with retirement savers as we move into the dashboard age.

A first step towards fixing the small pots problem

The eagerly anticipated report of the Department for Work and Pensions (DWP) working group on small pots, which was published in December, sets out potential ways forward for resolving the problem. It will be tough to fix but the size of the problem is growing, meaning that it’ll be harder to solve the longer it’s left.

Small deferred pension pots have been considered a significant problem since the inception of automatic enrolment in 2012. It has always been the case that employees switching jobs would leave behind stranded pots. The phenomenon has multiplied under auto-enrolment because the policy brought in workers who shifted employment far more frequently and whose salaries were lower. The Pensions Policy Institute estimates that as a consequence of this combination of deferred pots and a mass workplace pension system, there’ll be 27 million dormant small pots in circulation by 2035.

Small pots are an issue for providers, particularly the master trusts which serve the auto-enrolment market, because they may never generate the fees required to cover the costs of their administration. Regulatory levies are currently also calculated by number of members rather than assets. This has the consequence that regulatory costs have fallen disproportionately on schemes with large numbers of deferred small pots. These are the schemes which have picked up the bulk of the millions of employees brought into pension saving by automatic enrolment.


Higher financial burdens for schemes becomes a problem in turn for active members, since a cross-subsidy is required from the fees charged to them to cover the cost of administering the unprofitable pots. The problems for savers don’t end there. A trail of small pots makes it difficult for those employees with small pots to keep track of their pensions and to keep on top of what they need to save in order to generate a reasonable retirement income. Both members and providers have a strong interest in fixing the problem and both will benefit from removing unnecessary costs from the workplace pensions system.

Potential solutions

The working group’s report is a reasonable first step and gets a lot right – both the working group and DWP have done well in a short time to synthesize diverse views and come up with a way forward.

The first thing they got right is that there’s a need for an automatic solution to consolidate small pots held by different providers. The experience of Australia and small dormant super accounts is that the number of pots an individual has grows early in someone’s working life and they aren’t voluntarily consolidated until people approach retirement. Having a dashboard that facilitates voluntary consolidation, like Australia, hasn’t been enough to solve the problem.

The second thing they get right is the importance of administration reform. Again, the main lesson of the international experience is that transfers need to be cheaper, exchange of data needs to be rendered easier by an industry-wide standard and there’s a need for a rock-solid identity verification process so that automatic consolidation can be done securely.

The key insight here is that fixing known administration problems might enable quite a wide range of different options for consolidating small pots. Administrative reform creates a pitch on which more than one game might be played.

The second insight is that there are a lot of potential overlaps between the administration changes needed to power a consolidation solution and the components of the pensions’ dashboard. It seems likely that the data standard to be used by the dashboard might be used as the basis for a standard that might power a consolidation system.

There’s a lot more work to be done on consolidation models as well. The report recommends further work on pot follows member and on “consolidators”. The former would consolidate dormant pots to the active pot, while the latter would establish a single destination for all an individual’s deferred small pots. Both DWP and industry will need to look in more depth at how these consolidation options might work. Ideas that initially seem attractive can rapidly seem much less attractive as work progresses and technical difficulties emerge.

Member exchange

The report also recommends that the industry take forward work on “member exchange”, a variant of pot follows member. Member exchange is attractive as it might be possible to consolidate small pots using the bulk transfer regulations. This would obviate the need for further legislation and might enable master trusts to make faster progress on the problem.


The amount of work required now is, frankly, gargantuan. There needs to be a durable partnership between the pensions sector and the DWP in order to reconfigure a large part of how workplace pensions work.

Response to small pots report

On Thursday, December 17, the Department for Work and Pensions published the report from the industry’s small pots working group.

The publication of the report and its recommendations is an important step towards small pot consolidation within the automatic enrolment market. The Pensions Minister Guy Opperman MP has indicated he will study the report and recommendations in detail in 2021.

Tim Gosling, head of policy at The People’s Pension, who sat on the master trust expert panel that fed into the working group, said: “This report lays out a workable roadmap for dealing with the small pots problem. The scale of the challenge is significant: without action the problem will become much harder to manage and will destroy value for members. We welcome the Minister’s support for industry to lead on proof of concept trials, including support for the member exchange pilot.”


The People’s Pension response to the DWP consultation

The People’s Pension response to the DWP’s Investment Innovation and Future Consolidation consultation

The People’s Pension response to the DWP’s Investment Innovation and Future Consolidation consultation

Responding to the DWP’s Investment Innovation and Future Consolidation consultation, Gregg McClymont, director of policy at The People’s Pension, said:

“Pension fund management is not a cottage industry. It demands economies of scale. Pension scheme members would be better served by fewer, much larger schemes, run in the interests of their members and able to leverage the economies that come with genuine scale.

“But there is also a need to think about the consolidation process and how trustees will choose a new scheme. It’s important that the consolidation process is genuinely competitive. The Competition and Markets Authority’s recent investigation into the fiduciary market suggests there is much work to be done to ensure competitive tenders”.