UK - Sweden's Premium Pension Authority (PPM) is to introduce an automatic rebalancing model at the end of the year in a bid to help apathetic members control the risk levels within their portfolios.
The rebalancing model would adjust the asset allocation of member portfolios on the back of market movements to reflect their original preference.Daniel Barr, chief economist at the PPM, said the model had been included in the PPM’s business plan, with the aim of developing and introducing it by the end of the year.
“When people make an active choice in the system they can choose a maximum of five funds in which to place their money and they pick a proportion in each fund that takes them up to 100%,” Barr explained.
“But as different funds have different performance, that initial choice will deviate in the end from what was chosen.”
Under the plan, members will be able to tick a box on the PPM web site, handing the responsibility of monitoring and rebalancing their account over to the authority. Barr said this would likely be done on an annual basis.
“If someone has 50% in an equity fund and 50% in a fixed income fund and after one year that deviates to 60/40 we will rebalance back and sell order on the equity fund and buy order on the bond fund,” he added.
The PPM has been plagued by a lack of active decision-making among savers with complexity and lack of education being blamed for the apathy. There are currently more than 700 funds on offer.
“A lot of people make a choice once – 80% will never bother to monitor their choices,” Barr said. “This is a service for the members of the system so in that respect they can control their risk level.”
A government appointed commission, headed up by Karl-Olof Hammarkvist, a professor at the Stockholm School of Economics, handed down a review of the system late last year including proposals for far-reaching reform. The report is out for consultation with the deadline for comment 28 February.
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