Executives at Sweden’s buffer funds have used their annual reports to reignite the debate about the future shape of the country’s pension system.
The four main funds—AP1, AP2, AP3, and AP4—all achieved double digit returns in 2014, driven chiefly by strong equity performance.
AP4, the largest of the funds at SEK 295 billion ($35 billion), led returns with a 15.7% gain after expenses. AP1 registered a 14.6% gain, aided by the strength of the dollar, while AP2 and AP3 returned more than 13%.
However, 2014 was overshadowed by the uncertainty created by an imminent overhaul of the country’s buffer fund system. The five buffer funds, including the smaller private equity specialist AP6, are set to be merged into three larger asset pools under a streamlined governance structure. A centralised “reference portfolio” for all three funds has also been proposed, as has a wage cap for senior staff and an emphasis on lower costs.
The proposals have been put on hold, however, due to Sweden’s uncertain political landscape. Much of the last quarter of 2014 was dominated by negotiations between the minority government and right-wing opposition groups in an attempt to pass a budget and avoid a second election in March this year.
AP2 CEO Eva Halvarsson said in the fund’s 2014 report that the proposed changes to the system would reduce diversification and have a negative impact on the relative independence of the funds. She added that AP2 had a successful structure, in which administration and management had been “tailored” for each other over a period of more than 10 years, and likened the proposals to “removing one leg from a sturdy stool: The risk is high that it collapses.”
In AP3’s report, CEO Kerstin Hessius engaged in a three-way discussion with Bo Könberg, a former health and social security minister and chairman of Sweden’s Pension Authority, and Anna Hedborg, former chair of AP1’s board. Hessius argued that the new structure could weaken the link between the funds and their wider role in Sweden’s pension system, at a time when much greater demand is to be placed on them as the baby-boomer generation begins to retire.
At AP4, CEO Mats Andersson focussed on the contribution of active management to his fund’s impressive return. AP4’s active portfolio has outperformed its benchmark for 12 consecutive six-month periods, he said.
“The contribution over the past six years totals almost SEK 8 billion, which can be viewed in the context of an annual cost of about SEK 90 million to conduct active management,” Andersson added.
Speaking to Chief Investment Officer last year, Andersson said any cost constraints placed on the AP funds could threaten their ability to take advantage of long-term active management.
Each of the funds has worked hard to keep costs down by negotiating lower fees, bringing capabilities in house, and collaborating on some investments, they said.
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