Sweden is to shut down its private equity specialist fund, AP6, and roll it into its sister fund AP2 as part of a major overhaul of its public pension system.
The country’s finance ministry confirmed the plans on Wednesday after three years of debate. The government has invited feedback on its plans by October this year.
“There is little to suggest this current proposal will lead to any improvement.” —Kerstin Hessius, AP3AP6’s SEK23.6 billion ($3 billion) of unlisted assets will be transferred to AP2, the largest of the five “buffer” funds that manage assets for Sweden’s public pension system. One of AP1, AP3, and AP4 will also be closed, the ministry said on its website.
Kerstin Hessius, CEO of AP3 and a vocal critic of the proposals, said there was “little to suggest this current proposal will lead to any improvement” and warned the changes “could jeopardize the great values of the pension system.”
However, she promised to engage with the consultation in the best interests of current and future pensioners.
Speaking to CIO last year, AP4 CEO Mats Andersson voiced concerns that the transition from five funds to three could prove much more costly than the politicians behind the plans realized.
“In my experience, when a transition like this occurs you will lose money,” Andersson said, adding that transition costs would be “very hard to monitor”.
“In my experience, when a transition like this occurs you will lose money.” —Mats Andersson, AP4AP2 CEO Eva Halvarsson wrote in her fund’s 2014 annual report that the proposals were akin to “removing one leg from a sturdy stool: The risk is high that it collapses.”
As well as the headline changes to the funds’ structures, the proposal set out new investment guidelines. A “prudent person principle” would be introduced, replacing the current quantitative methods of deciding asset allocations. The AP funds’ ability to invest in unlisted assets would be increased “considerably”, the finance ministry said. The new, more flexible guidelines are broadly supported by the AP funds’ investment staff.
Under the new regime a National Pension Fund Board would be established with oversight for the three remaining funds. The board would set return targets and construct a reference portfolio to act as a benchmark. Currently, each AP fund has its own board of directors.
Finance Minister Per Bolund said the changes would strengthen the buffer fund system and improve the remaining funds’ ability to achieve higher returns.
The overhaul was initially proposed three years ago following a review by Mats Langensjö, a former senior director at Goldman Sachs and Aon Consulting. The final document was expected last year but was delayed after a general election brought a hung parliament and a period of uncertainty as new Prime Minister Stefan Löfven worked to form a minority government coalition.
Sweden’s buffer funds have long been admired outside of the country, and have been among the most forward-thinking in the field of environmental, social, and governance investing. As well as supporting a number of climate change initiatives, the funds have also been active shareholders, divesting from companies that fail to live up to their ethical standards.
AP1 won the award for governance at this year’s CIO European Innovation Awards, following CIO Mikael Angberg’s introduction of new processes since joining in December 2013. Hans Fahlin, CIO of AP2, was named in the 2014 Power 100.
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