Swedish Pension Fund AP4 Returns 9.1% | Chief Investment Officer

The Fourth Swedish National Pension Fund, also known as AP4, reported a 9.1% return for 2017. It has generated an average annual return of 7.3% during the last 10 years, and a 6.1% return per annum since its inception in 2001.

The fund’s capital increased SEK30.1 billion ($3.68 billion) during 2017 to SEK356.6 billion, outperforming the fund’s income index and the long-term return target of a 4.5% real annual return. Net outflows to the national pension system totaled SEK 7.4 billion during the year.

“On the back of generally favorable performance for the global equity markets, AP4 reports a strong return for 2017,” said Niklas Ekvall, CEO of AP4, in a release. “Interest rates were basically unchanged at extremely low levels, and fixed-income investments therefore delivered low returns during 2017.”

The AP funds make up about 15% of the Swedish pension system, and act as a buffer to cover future pension disbursements. The AP funds also contribute to the long-term financing of the pension system.

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Since 2009, payments to current pensioners have been larger than the contributions to the pension system from current wage earners, which has created a negative net inflow. Funds are therefore paid-out from the AP Funds annually to meet the pension payments to current pensioners. According to forecasts by the Swedish Pension Agency, it will have to take capital from the AP funds over the next 25 to 30 years to cover pension disbursements.

For 2017, AP4’s total asset management costs were 0.10%, with operating expenses of 0.06%, and commission expenses of 0.04%, expressed as a percentage of average fund capital under management. According to a study by CEM Benchmarking, the fund’s cost level was 46% lower than comparable international pension funds.

“AP4 will continue to develop sustainable investments in the focus areas [of] climate and environment and corporate governance,” said Ekvall. “Our low-carbon strategies increased to almost 31% of the global equity portfolio during 2017.”

Ekvall said the fund’s goal is to increase sustainable investments, and to widen their scope.

“We are doing this to lower the risk in the portfolio and create conditions for better returns,” he said. “Active corporate governance is AP4’s most important tool for influencing and interacting with the companies in which we are a shareholder.”

Tags: AP4, Niklas Ekvall, Pension, Returns, Sweden

To address the future of the USS pension scheme, Universities UK (UUK) has extended itself to the University and College Union (UCU) via an open letter to discuss the future of the Universities Superannuation Scheme (USS) in a meeting on Tuesday, Feb. 27.

The letter, published Thursday, laments how the two groups have been in talks throughout 2017, inviting scheme members to “to take the opportunity to put forward any proposals you feel may not have been sufficiently considered.”

“Universities UK, as the representative of employers, has been in talks with the University and College Union (UCU) throughout 2017, and we have met more than 35 times since the start of 2017 to try to find a way forward,” the letter read. “The benefit changes that are proposed address the current issues with the scheme and also ensure that the maximum amount of the employers’ contribution goes towards members’ benefits. It is the best solution for this valuation to ensure the sustainability of the scheme.”

The letter also notes how Universities UK is open to changing the scheme in a way that reintroduces defined benefits, but only if there is improvement in economic and funding conditions. Some of the talks UUK would like to further discuss include exploring alternative models for risk sharing, a well-defined framework for the future re-introduction of defined benefit plans, how deficit recovery contributions can be kept as low as possible, and engaging with stakeholders on the implementation of any investment de-risking.

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A two-month consultation will begin at the end of March, in which the UUK will solicit the views of any USS member as a way to consider proposals and attempt to consider “every possible angle.”

As for the meeting, UUK called for the engagement the following day, hoping to reverse the strike as quickly as it came.

“It is of paramount importance that both sides make every effort to meet—despite the ongoing industrial action—to stop any impact and disruption to students,” a UUK statement announcing the meeting read.

“Universities UK has never refused to continue to try to find an affordable, mutually acceptable solution. We would be willing to discuss a credible proposal that addresses the significant financial issues the scheme is facing. The problem that we share as interested parties in USS is that, to continue to offer current benefits, contributions would have to rise by approximately £1 billion per annum. The scheme has a £6.1 billion deficit and there has been an increase of more than a third in the cost of future pensions.”

After nearly a year of discussions about changing the defined benefit plans of USS members to defined contributions, which the UCU says would reduce benefits for a typical professor £10,000 per year, a strike against the actions began Thursday.

Although the scheme is facing a more than £6 billion shortfall, prompting the changes, the union was not only dissatisfied with the decision, but also the figure, as it called the evaluation method “recklessly prudent.”

Tags: Defined benefit (db) pension plans, Pension, strikes, Universities UK, University and College Union