With practically half a million members and pensioners in Sweden’s public sector, Kåpan Pensioner is a defined contribution scheme with a guaranteed rate of return and additional bonus. It is in competition with some of the major life insurance companies in Sweden, such as AMF and Skandia, as they can be selected as alternatives by Kåpan members to manage their assets. But Kåpan remains the default option for those that do not make an active choice. It also offers its products to members of private pension schemes.
Kåpan entered the IPE Awards out of confidence for its performance, cost controls and investment strategy. “For the past five years Kåpan Pensioner’s performance has beaten that of all the funds in its peer group,” the scheme boasts. “The accumulated return amounted to 5.2%, to be compared a peer group average of 3% and the second best performing fund reporting at 4.5%,” it adds.
In addition, Kåpan claims it has posted the highest bonus rate compared with its peers during each year for the past three years. Its 3.5%, 5% and 10% figures give an average of 6.2%, whereas other funds comprising its peer group averaged just 3.2% during the same period.
“This performance has largely been driven by a successful strategic beta allocation, where we have remained overweight emerging markets and Swedish equities,” Kåpan says. But other assets have also proved valuable. “Holdings in real estate and timber have also shown strong value growth during the period.”
Kåpan also uses active management for some of its portfolios. “Alpha has been generated mainly by positions in long dated index-linked bonds in the internally managed bond portfolio and by successfully selecting good external equity managers,” the scheme explains. During 2005, Kåpan says these managers managed extra returns - the alpha - totalling 3.5% of the capital invested in those assets.

Kåpan is proud to say it has successfully turned its fortunes around. It says its solvency in 2002 was under extreme pressure. It decided to diversify by investing in equity call options which increased its overall equity exposure and expected returns but with limited risk. “The solvency rate has since improved, going from 104% in 2002 to 143% by June 2006,” it points out.
Kåpan says the fund has also been able to establish a very low level of administrative cost - just 0.17% of its assets under management, which is well below the industry average and half the costs the next scheme in its peer group faces for the same services. “Considering the limited size of the assets we manage compared with our peers, this is an impressively high level of cost control,” the scheme says.
Kåpan believes these low costs have been attained by an effective outsourcing strategy that means all customer, administrative and actuarial services are now provided externally. The scheme says not only does this make communication and passing on information to members very efficient, but also enables it to focus internal resources on risk management and accounting.
Its internal portfolio management team is also streamlined, with three managers taking responsibility for 80% of its assets under management. External managers take care of Kåpan’s foreign equity portfolios, its hedge fund investments and some of its real estate holdings.
In January 2006, a new regulatory framework was introduced in Sweden, which requires market valuation of asset and liabilities as well as stress testing, with schemes then having to stipulate risk buffer requirements. This is known as the ‘traffic light’ system. To meet this challenge, Kåpan has implemented systems which value the liabilities on a daily basis and run the traffic light test to ascertain and control risk.
“The present strategy is to focus on investments that will increase expected returns and decrease risk within given risk budgets,” Kåpan explains. This focus has led the scheme to consider higher levels of investment in asymmetric instruments, such as equity index calls, leveraged structured credit vehicles, and greater diversification in all asset classes.

At the same time, Kåpan says direct equity holdings have been reduced and the gap in duration between assets and liabilities reduced. “The risk budget of the fund is thereby more efficiently used since it has increased the ability to take on more risk in other asset classes with higher expected returns,” it claims. 
Kåpan believes this move is quite bold as it will differentiate Kåpan in terms of both returns and risk from its peers as its investment policy deviates from theirs. Though returns may fluctuate in relation with those of its peers in the short-term, Kåpan is confident that over time it will generate consistently high returns that match those it has produced in the past few years.
Kåpan says the real acknowledgement of its achievements was the high ranking it received in the Swedish business magazine, Affärsvärlden, earlier this year, which undertook an extensive study of the performance of all 88 asset managers of a similar size in Sweden. The ranking included not only pension funds but also listed investment companies, asset managers, hedge funds, and private equity companies. Kåpan was ranked number eight overall in the survey, way ahead of all managers in its peer group and highest of all pension fund managers.

Highlights and achievements
As with many schemes, Kåpan’s decision to outsource many administrative services is not just a great means of keeping costs down, but allows in-house teams to focus their attention more on investment management and risk control.
Though it acts as a default fund for public sector workers, Kåpan’s positive approach to its role as a pension fund enables it to offer the best possible cover for its large membership and its solid rating in one of Sweden’s leading business magazine is proof its corporate strategy is bearing fruit.
Competing with some of the country’s top life insurance funds is no advertising gimmick. The results and proactive approach to its investment strategy and liability matching laws should give it real credibility among those looking for a good pension.