Major Shake Up for Sweden’s Pension System

(March 13, 2014) — Two of Sweden’s pension “buffer” funds are set to disappear and those that remain would gain a sponsor under the government’s proposal to update its national pension system.

It has been proposed that AP funds numbers one to four and six be reduced to a total of just three. AP7, which is a default investment fund, will remain untouched.

An overhaul of the system, which has been in place for 15 years, will also see a governing board put in place for the first time to oversee all aspects of asset-liability matching (ALM), risk management, and setting of investment objectives.

Mats Langensjö, a Swedish pension specialist who carried out a report on the system for the government in 2012, spoke exclusively to aiCIO about the proposal, and how it had taken on board his recommendation of a “a clear separation of owner and sponsorship from the investment management”.

“The really good thing to come out of the proposal is the system of ownership through the new board structure,” Langensjö said. “This will allow a more flexible and modern governance—but the devil will be in the detail of implementation, as the framework has only been agreed to in principle by politicians.”

Langensjö said a sponsoring board would free the funds from some cumbersome investment rules that are in place at the moment.

“Since the AP funds were set up 15 years ago, there has not been a sponsor or anyone responsible to control and govern the total capital in the five buffer funds, but there has been very detailed legislation and just one objective—to fill a potential funding gap. This means liabilities have been very vague and the portfolios have all looked alike,” said Langensjö. “There has been no diversification benefit and the funds have not been able or encouraged to look long-term enough with their investments. They have not really ventured into illiquid assets, so this move should allow them to be more diversified and invest more for the long term.”

Langensjö stressed the importance of this board understanding how the AP funds have such a vague liability, what their objective is, and what kind of risk—and how much of it—they can take. “It needs to be made up of investment professionals as this is where the ALM work will probably take place. Until now, no one has had overall responsibility or total risk control of the funds—it just ‘happened’,” he said.

The AP funds make up between 8% and 10% of the total pension balance sheet, but their implementation 15 years ago was done in a rush, according to Langensjö. “What was there before was just repackaged by taking away the old investment rules that had applied to life insurers, which had already been taken away for the private sector, ensuring that they were already out-dated.

“The AP funds had to deliver returns that were higher than [salary inflation] to contribute to the system, and have relied on equities to do so. When you look at the past 10 years, which have mainly been in crisis, it is not what the politicians of the time had expected.”

The only fund to have taken a different route has been AP6, which has operated as a private equity or venture capital investor. Its assets—€2.5 billion—are around a tenth of the value of each of its AP peers that face being dismantled.

Langensjö said the proposal was “evolution” rather than “change”, adding that systems in other counties have adapted to a new environment and Sweden had been taking note of positive outcomes elsewhere.

Although no timescale has been set out for the transformation, it is understood that the government will move as quickly as possible to avoid unnecessary stress to the staff and impact on each fund’s investment activity.

“The AP funds have been swimming with bricks around their necks,” said Langensjö. “They had a high allocation to equities, which helped in 2013 but only contributes to a short-term view. We need to maintain what is working and use what is already there. But we need the scale benefits, access to global markets, and ability to invest more dynamically.”

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