State of flux
The pensions industry in Sweden is undergoing a major restructuring. The creation of new schemes, poor investment returns and further developments in the PPM system have kept professionals in the industry very busy during the past few months. It seems this activity will continue in the near future.
The very well-structured retirement provision system in Sweden has entered a new stage of maturity and Swedes are looking for the best solutions to face current market and social conditions.
The year started in Sweden with news about the creation of a new pensions fund for up to 220,000 employees in the public sector. The Swedish National Agency for Government Employees and its representative trade union, SEKO, announced in February that negotiations to create the new fund were under way. When later in the year details of the new collectively agreed supplementary schemes were made public, Swedish employers showed their anger, claiming that the structure of the scheme could encourage employees in the private sector to demand higher contributions from their companies to their own schemes.
Under the new fund, known as PA-03, government employers will contribute a total of 4.3% of the employee's salary into the pensions plan, whereas current contributions in the public sector represent 3.5%. The private sectors employees’ umbrella trade union, PTK, announced its intention to use PA-03 as a model for the replacement scheme it is negotiating with Svensk Naringsliv, the Confederation of Swedish Enterprises, which represents 47,000 companies.
This scheme will replace the current final salary scheme, ITP, and will be run under a defined contribution (DC) model. Negotiations started in 1994 and the PTK expects the new scheme to be launched some time this autumn. This will represent a huge step towards the consolidation of DC pension plans in Sweden, where more than 2m people have been moved into second-pillar contribution-based pension funds in the space of only a few years. The replacement scheme, covering around 600,000 employees, will dramatically increase the size of the DC market.
The Swedish National Pension Funds (APs) have undergone major restructuring during the past few months. Poor investment performance has forced the funds to fire managers, change asset allocation and set different investment strategies for the future.
In February, the AP2 fund announced its intention to terminate contracts with some of its external managers, and manage more assets in-house. At the end of June, AP2 made public a decline in assets of 9.3% bringing the fund down Skr24.3bn (€13.6bn). It announced a change in its investment strategy including an increase in its exposure to small and medium-sized companies, both local and foreign.
AP3 also suffered a significant loss during the first half of the year representing 7.4% of its assets, resulting from the poor performance of its equity portfolio, which accounts for 55% of total assets. The fund announced details of its new corporate governance policy, including demands for a clearer division of roles between corporate managements and boards of directors.
High equity exposure also resulted in the AP4 fund obtaining an overall return for 2001 of -5%. The fund, created in 2000 with a conservative investment strategy involving only a 30% exposure to equities, had dramatically changed its asset allocation during 2001, allocating around 63% of total assets to stocks.
Finally AP7 also decided to take a more active role in corporate governance and sustainability by announcing the sale of its shares in 26 global companies for having failed to satisfy the fund’s environmental and ethical requirements. The decision taken by the AP7 fund will definitely have an important impact in the market as a whole, since it is the default fund of the PPM system, and has around 5m members. Recent figures say that around 86% of people joining the scheme for the first time preferred not to choose a fund and ended up in AP7. Because of this any decision in terms of investment strategy taken by the fund is closely monitored by the whole pensions industry in Sweden.
The launch of the replacement scheme for the current ITP insurance solution and the extent to which the PA-03 fund will be a model for the private sector will no doubt be among the most interesting developments to follow up in the months to come. It will also become clear whether the restructuring in investment strategies undertaken by some of the country’s largest funds translates into better performance.