| Abstract: |
Sweden's new multi-pillar pension system includes a system of mandatory
fully-funded individual accounts. The Swedish system tries to keep
administrative costs down through centralized management of the collection of
contributions, switching among fund options, and record-keeping and
communication with account holders. The Swedish system offers contributors
more than 600 fund options. However, in the most recent rounds of fund choice,
more than 90 percent of new labor market entrants have not made an active
choice of funds, and thus have ended up in a government-sponsored default
fund. The Swedish system of individual accounts offers a number of lessons for
countries considering adoption of a mandatory individual account tier. First,
centralized administration of record-keeping, communication and trading
functions can help to keep administrative costs down. Second, the lead time
needed to set up such a system is considerable. Third, if entry barriers for
funds are low, a very large number of fund options are likely to be offered.
Fourth, engaging new labor market entrants in fund choice is likely to be
difficult, and these barriers are likely to be particularly high for some
groups-notably those with limited incomes and low English language skills.
Fifth, in the absence of entry barriers for funds, a significant percentage of
those making an active fund choice may choose funds that are very specialized
and risky. Finally, the likelihood of limited active fund choice means that
special care must be devoted both to the design of a default fund and to
communicating to potential participants what asset allocation and risk-return
trade-offs the default fund is likely to make. |