Small funds suffer in PPM fee hike
Published: 07 May, 2007
Niche funds getting too expensive and may disappear from premium pension system
The new fee structure for funds within the PPM, the Swedish national premium pension system, has reignited the debate on whether or not there are too many funds within the system. The new fee structure, which came into force on 1 April makes it less profitable for fund companies to offer a large number of fund choices within the PPM and it is likely to result in some investment houses withdrawing their smaller fund offerings.
“Large fund companies will no longer be able to afford to set up new funds and the selection of funds in the system will be significantly reduced,” said Fredrik Nordström, CEO at AMF Pension Fund Management.
Indeed, AMF Pension is now considering dropping one of its eight funds from the PPM.
“The new discount model for PPM funds will remove a lot of the profitability of offering funds. It will lead to companies being forced to reconsider their niche funds within the PPM. In time, our small companies fund is likely to be withdrawn,” said Mr Nordström.
Managers have to give part of the investment fees they collect from savers back to the PPM, which are then returned to investors. On 1 April this amount increased. On average, the new model reduces the costs for the savers from 0.4 per cent to 0.3 per cent of the managed capital. The way fees are calculated also changed to take into account the total assets a manager has listed on the system rather than the assets it has in each of its individual funds.
Less interesting alternatives
Anders Alvin, CEO at Kaupthing Fonder, which offers eight PPM funds, also believes this will make the provision of a lot of smaller funds untenable for some managers. “The new system will make it less interesting to offer a large number of alternatives,” he said. “It won’t be profitable to keep certain funds in the PPM, in particular niche funds. We will probably remove our least popular funds.”
Daniel Barr, chief economist at PPM, denies that the aim of the new fee structure is to force a cut in the number of PPM funds. “Our aim has not been to try and decrease the number of choices. We have no such mandate, but if that was our ambition, there are more efficient ways of doing so,” he said. “I don’t believe the new fee structure will lead to a reduced number of funds, but rather the number of funds in the system will stay the same and will not increase.”
A fund manager that fulfils the basic regulatory requirements is free to register its fund on the system. There is, however, a limit of 25 funds that each manager may register. PPM is able to negotiate a significant discount on management costs by being a large player. Although the pension savers choose the investment funds, PPM is the owner of the fund units and is therefore in a position to demand a quantity discount from the participating fund managers. The new discount model is said to increase the amount of money paid back to the savers by roughly ?27m. Last year, savers got back ?110m. These are reinvested in funds on behalf of the pension savers.
The PPM system has long been under criticism for offering too many fund options, which is said to make it impossible for pension savers to understand all of the investment choices. Since its launch in 2000, the number of funds listed has grown from around 460 to almost 800. Despite the fund options available, around 90 per cent of the money within the system has been invested in just 150 funds. A survey from 2005 showed that only 6 per cent of savers agreed that they had sufficient knowledge to manage their premium pension savings.
Others believe that the PPM should offer the same amount of funds that exist on the open market and that the savers who wish to make an active choice should be able to do so without restrictions. A large number of fund options are also believed to increase competition among the fund managers.
Cutting fund numbers
A review of the premium pension system in 2004, headed by Karl-Olof Hammarkvist, professor at the Stockholm School of Economics, suggested that the number of funds should be cut to 150. He also recommended offering Swedish pension savers better guidance on different investment products and opening up AP 7’s Premium Savings Fund, the default option for savers who do not wish to actively manage their funds, for active selection.
Peter Norman, president of AP 7, has also been a strong critic of the large number of funds and has advocated just three simple risk-adjusted choices. PPM has also advocated the possibility of it being able to remove funds from the system that do not fulfil certain criteria.
In 2006, PPM hired WassumRating and Standard and Poor’s to rank the approximately 800 funds housed within its national pension savings platform. The contracts will run until the end of 2009, but the agreements may be extended by a further 12 months.
No changes to the current system have yet been enforced or decided upon.
CL
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