Free Market fundamentalism
The big idea behind opening up a part of the Swedish mandatory pension savings systems to free market competition was to give pension savers access to better investment management and higher returns. This deregulation was based on the same free-market fundamentalism that dramatically changed the Swedish school system and care industry. The care sector got the Carema scandal. Schools’ PISA results dropped and the list of “free schools” not delivering proper education is still growing. Allra is the Pension savings industry’s version of free market reforms gone wrong.
Reality catches up
After more than twenty years of this experiment, it is clear that the collective of free-market pension managers did not improve returns for savers. On top of that, there have been several abuses by unscrupulous fund entrepreneurs taking money straight out of the pockets of the savers whose future pensions they were supposed to look after. As can be seen with the discussions about Covid vaccination side effects, people hesitate when faced with even a very small risk of getting a very bad result from an active decision. They will rather sit on the fence than take a decision that turns out badly. If Allra are acquitted in the court of appeal, this may hurt the public’s trust in Sweden’s fund industry. This would be bad for the broader social contract where citizens are expected to shoulder an increasing responsibility for saving monies for their financial security during old age. If Allra are acquitted, the public’s trust in the fund industry as a reliable part of the social contract is at stake.
Board members of Allra, who quickly resigned when the first alarming article was published, had to run the gauntlet in media, and then saw themselves being removed from several other positions of trust.
Dishonesty cleverly disguised
Most independent financial experts agree that what Allra did was dishonest and to the financial detriment of their savers. If Allra is acquitted again, it shows that it is possible to tap into savers' money as long as it is done below the regulatory radar screen and you have good lawyers. The Allra scandal unfolded in the media in early 2017. The acquittal in the District Court caused many in the financial industry to shake their heads. Even Sweden’s Finance Minister Magdalena Andersson commented: "It sucks."
The Allra owners had a company in Malta that acted as a purchasing centre and intermediary for the procurement of certain investments by the funds managed by Allra. These intermediaries added fat margins to unnecessarily complex financial instruments. These mark-up profits went to the owners who bought a helicopter and the most expensive villa in an exclusive suburb of Stockholm. A conservative estimate of the cost of these shenanigans to Allra’s pension savers is the Swedish Pensions Authority’s claim for damages of SEK 242 million (24MEUR) against Allra’s owners.
Some of the well-known board members of Allra, who quickly resigned when the first alarming article was published, had to run the gauntlet in media, and then saw themselves being removed from several other positions of trust. Their clients understood more than the District Court and wanted to avoid being tainted.
The District Court’s acquittal has been appealed by the Swedish Pensions Authority. Another Pension Manager, Falcon Fund's owners have been sentenced to prison for breach of trust. Two other players; Solidar and Independent funds have been hastily shut down. The Pension authority recently recovered 80 MSEK from the left-overs of their
On the back of these scandals, the Swedish government decided to support a Pension Authority proposal to reduce the 840 pension managers with access to the official fund web site to sell their services, down to currently 480. A second reduction is under way, with even stricter scrutiny of managers. A new independent Government body will screen and select managers. This is expected to reduce the total number to 150-200 managers. They will all need to sign up to the United Nations PRI (Principles for Responsible Investments).
These are all good steps but will not necessarily prevent another Allra scandal. The PRI are focused on where capital is invested. The Allra trick was to extract money from the flows of cash and investments. Like a private congestion charge. How cash, costs, commissions, fees, valuations etc. are handled is technical and not transparent to savers. It was by tapping into these transaction flows that Allra’s owners found ways to enrich themselves. The devil is indeed in the details.
The Allra case shows that where there are trusting, perhaps less well-informed savers, there will be unscrupulous entrepreneurs who with ingenuity and creativity will find ways to extract money from these savers. Laws and regulations will often be one step behind. To protect savers against another Allra, there needs to be a faster, nimbler way of catching poachers. This could be achieved by introducing a mandatory savers’ representative on the board of the investment managers who want to sell pension management services to retail investors. Such a board representative could be appointed by the Pension Authority and have access to all relevant information about how the manager handles cash, costs, transactions etc.. That person would need to have the experience and competence of an old poacher to be a good gamekeeper. Savers can sleep better if they know that someone with technical understanding of the inner workings of fund management is always on the look-out for any new Allra tricks.