Risk-averse Brits have long struggled to get into investing. Luckily, the similarly cautious Swedes can teach us a few things, writes Martin Björnberg
When City minister Emma Reynolds announced the UK needed a “new investment culture”, she articulated a long-recognised truth: Britain is underinvested. The figures are stark. Discounting pensions, just eight per cent of Britons invest directly. The average across G7 nations is nearly twice that, whilst in the US it is over four times higher. And this is terrible news for everyone. Capital markets are held back. Meanwhile, savers, are potentially losing out since returns from elsewhere are worse. So what can be done?
To solve the problem we must first understand it. British comparative aversion to equities is not entirely irrational; rather it stems partly from our love – some might say obsession – with property. When Britons have money to invest they usually do so in bricks-and-mortar, where 50 per cent of our national savings reside. A historic sense that homes are castles, combined with real belief in the phrase “safe as houses”, was further encouraged by (now-repealed) tax incentives making buy-to-let even more attractive. When we don’t sink our money into property, we keep it as cash, at 15 per cent the next largest tranche. Recently this briefly made sense, as interest rates surged, but over the last century, stocks and shares have outperformed cash in nine out of 10 decades. Moreover, cash is ever at risk from inflation.
How the Swedes invest
The frequent comparison with the US is potentially unhelpful; American investing culture is different. A need to be financially self-sufficient where things like medical care and higher education are concerned, combined with fewer workplace pensions, have long meant the US favours equities. Their stock market is also bigger – and often very successful. And, crucially, they have just been doing it for longer. Risk-averse Britons will have to experience a paradigm shift to be tempted away from cash or buy-to-lets; in short, we need a totally different model. Happily, one exists.
In 1984, Sweden launched Allemansfonder, or “everyman’s fund”. Ordinary Swedes could save up to SEK800 a month – around £175 today – in a public savings fund, investing in Swedish equities. A strong regulatory framework, which capped fund sizes and promoted competition, meant they became very popular – especially since returns were tax free. By 1990 there were 1.7m Allemansfonder accounts in Sweden. Successive governments raised deposit limits and even when taxation was introduced in 1991, it was, at 20 per cent, lower than capital gains tax.
Accordingly, participation continued to rise exponentially. Equity markets proved resilient through the 1990s crisis that hit the Swedish banking and real estate sectors, thus reinforcing this. Even when tax incentives were removed entirely in 1997, it did not dampen enthusiasm. Today, around 80 per cent of Swedes are directly invested in equities funds. And they have seen solid returns. In Sweden’s pension system the individual can also make an active investment choice of about 11 per cent of their state pension contribution (Premiepension). This is typically invested in mutual funds resembling Allemansfonder. Since its introduction in 2000, the typical saver has had 7.7 per cent compound annual growth on average.
The success of the Swedish model has delivered for savers and companies alike. As the market has matured, it has also drawn investment towards exactly the sort of high-growth industries the UK also specialises in: innovation and technology. Estimates suggest if we could match even US equity participation levels, let alone Sweden’s, it would inject around £3.5 trillion into UK capital markets.
How the UK can emulate Sweden
If risk-averse Swedes, who tend to take a longer-term, prudential outlook, can be convinced to do this, there is no reason Brits can’t. The government can create the right environment, and this means two things: incentives, in the form of favourable tax treatment, and advice.
The first is simple enough, the second trickier. Almost every study into UK financial literacy shows it remains stubbornly low. Changing this will mean a step-change in education, but that is a longer-term project. For now, we would need to rethink the restrictions on financial advice. Current rules – which have the proper aim of protecting customers – have the unintended consequence that your bank can’t tell you when you are better off putting spare cash in a fund rather than a savings account. The advice-guidance boundary is under review, but currently our rigorous legislation around financial advice, despite the best intentions, means all investing is seen as a specialised, and perhaps risky, practice best left to professionals.
Ultimately, this can change. It might even be one of the fundamental growth drivers the government desperately needs. It will require political will to deliver, but if the government wants to encourage equity investment, it can – and the Swedish model is a great place to start.
Martin Björnberg is chief financial officer at Handelsbanken