It’s a little known fact that the Swedes lead Europe – and probably the world – when it comes to the proportion of the population that puts their money in equities and other risk based investments. We think the Brits are pretty high up the scale, with some 28% of British adults holding risk-based investments according to our consumer research – on the rise and higher than in other European countries. So what can we learn from Sweden about getting a much higher percentage of the population to invest? What’s their secret?
The premium pension system
Part of the answer lies in their ‘premium pension’ system (the ‘PPM’), where 2.5% of each individual’s compulsory national insurance contribution goes into a government-backed investment platform. There, people can choose up to five funds from a list of more than 800 that includes local and foreign funds as well as active and passive funds.
The PPM represents a 100% fund penetration among Swedes aged 18 to 76. As a result of the PPM, most people engage with pensions and investments early on in their lives. They are exposed to an open architecture environment and become accustomed to making their own fund choices. In fact, 70% of the assets on the PPM platform sit outside the default fund offered.
Much more than pensions…
Even if you exclude the PPM and workplace pensions, a truly impressive 65% of Swedes invest in funds. And that doesn’t take into account the estimated 28% who invest in direct securities.
The high level of engagement with funds is at least partly driven by their familiarity with the PPM. But there is more to it than that. Successive Swedish governments have encouraged a long term savings culture ever since the seventies. Initiatives have included income tax reliefs and tax-free capital gains for funds, as well as the more recent tax-efficient investment accounts. What’s more, the industry is proactively involved in educational initiatives with programmes such as Like your finances or Young personal finances.
So why have the Brits fallen so far short of the Swedish levels of investment in funds?
The possible explanations around differences in national character and more equality of incomes are not convincing. The most obvious driver is the Swedish government’s keenness to encourage investment. In fact, they have been bold and flexible enough to try new things until they have achieved a nation of fund investors. In contrast, the UK PEP and subsequently ISA regimes have evolved but its essential nature has changed little.
Interestingly, between 1988 and 2012 the UK had a system of contracting out of the second tier pension that resembled the Swedish PPM is some key characteristics. DC pension scheme members were able to invest national insurance contribution rebates into DC pension funds.
Yet the Brits are still far behind the Swedes as investors – at least by this measure. The main difference is that contracting out was not available to anything like the whole of the UK working population. And now contracting out has ended. All Swedes have been involved in investing in pension funds for a number of years – and it seems to have impacted on their propensity to invest.
It would be nice to think that, on top of AE, the UK government might consider copying the the Swedish PPM, but the cost in NI contributions to the Exchequer makes it very unlikely indeed.