The CEOs and chairmen of Sweden’s four public pension funds have written an open letter to the country’s government setting out the case against proposed reform.
“We see significant risks in the proposal and it is our duty to highlight these for those who depend on the returns generated by the AP funds.”The letter, published today in Swedish newspaper Dagens Nyheter, argued that the proposals were “ill-defined and bureaucratic”. The AP fund chiefs added that it heightened the risk of “short-term politically-motivated mismanagement” for the SEK 1.2 trillion ($142 billion) managed by the four funds.
It is the strongest rebuttal yet of the government’s proposals and the first time there has been a public, co-ordinated response from AP1, AP2, AP3, and AP4. Under the plans, the four will become three funds with a streamlined governance structure, while private equity specialist fund AP6 will be shut down completely.
But the fund chiefs warned that the proposals lacked a proper assessment of costs and other impacts on the existing portfolios. According to a third-party study commissioned by the four funds, even a 10-basis-point reduction in annual returns as a result of the overhaul would mean missing out on more than SEK 1 billion.
On top of this, the funds warned that costs could amount to “several billion kronor” over the two years of implementation. “This contrasts with the only expected saving stated in the proposal of around SEK 50 million annually. It will be several generations before these costs are recouped.”
In addition, a shortened time horizon due to closer involvement of politicians would “put an end” to long-term investments such as real estate and infrastructure, they argued.
A proposed new “reference portfolio” would, the letter claimed, direct the three remaining funds towards “short-term low-yield index tracking” and would encourage the divestment of Swedish assets.
“There is a risk that greater bureaucracy and inefficient management will lead to less opportunity for the AP funds to make profitable investments.”“We are now raising major concerns about the future of the Swedish pension system because the proposed new rules for the AP funds will make the system worse in a number of respects,” they wrote. “We see significant risks in the proposal and it is our duty to highlight these for those who depend on the returns generated by the AP funds—namely, current and future pensioners.”
The letter also warned of the risk of lower pensions for future generations of Swedish pensioners, as the new structure would limit long term planning and reduce diversification.
“There is a risk that greater bureaucracy and inefficient management will lead to less opportunity for the AP funds to make profitable investments. In financial terms, this will involve significant losses for pensioners,” the fund chiefs wrote. The quartet of funds had contributed SEK 20 billion over the past eight years through active returns, the letter said.
In addition, the leaders warned that there would be “significantly less scope for conducting professional, strategic, and proactive asset management and less opportunity to act as a responsible shareholder.”
The Swedish government plans to implement the reform next year, although many details are still yet to be decided—including which of the four main AP funds will be closed.
The letter is available in full in English on AP2’s website.
Related: Sweden to Shut AP6, Confirms Pension System Overhaul & The Unknown