Sweden’s system of AP national pensions buffer funds is being reformed, reducing the number of funds to three from five. The parliamentary Pensions Group decided in January that a raft of proposals in official investigator Tord Gransbo’s June 2024 report should go ahead.
The five funds – AP1, AP2, AP3, AP4 and AP6 – manage the SEK2.1trn (€188bn) of buffer capital in Sweden’s income pension, the main element of the state pension, alongside the defined contribution (DC) premium pension system.
The reform aims to “modernise and streamline” the collective management of the funds’ buffer capital.
The first four funds all started out in 2000 with an equal amount of capital, and after varying degrees of investment success, now manage between SEK450bn and SEK550bn apiece, operating according to identical mandates. AP6, on the other hand, invests solely in private equity and manages much less, at SEK77.1bn at the end of last year.
Consolidation proposals
Under the reform’s seven proposals, the three Stockholm-based AP funds are to be consolidated into two funds, with AP1 being liquidated and its assets divided equally between AP3 and AP4.
Meanwhile in the west-coast city of Gothenburg, where AP2 and AP6 are both based, AP6 – which currently has no inflows or outflows – is to be incorporated into the buffer fund system by transferring all its operations and assets into AP2.
The proposals also make more specific the expertise AP fund boards should have, as a whole, listing the areas of financial economics, macroeconomics, illiquid assets, sustainability, leadership, corporate governance, pension systems and public administration.
The reform’s proposals concerning boards and administration also include AP7, the other national pension fund, which is not a buffer fund but the default provider in the premium pension system. With SEK1.4trn under management, it is far larger than the buffer funds.
The legislative changes, set to take effect on 1 January 2026, seem likely to be passed by parliament largely unchanged, but will be consulted on again before being presented to parliament.
It was the Pension Group rather than Gransbo that decided which of the three Stockholm-based funds should disappear, though Gransbo gave some guidance. He cited the potential for long-term returns as one criterion for which funds should remain, pointing towards historical returns from 2001 as the best way to estimate that.
Returns and allocations
According to the 2024 white paper on the AP funds, AP3 and AP4 each produced average real returns of 4.6% between 2001 and 2023 – higher than AP1’s average of 4.1% for the 23-year period.
The three remaining buffer funds may be less easy to compare than were the four original equal-mandate buffer funds.
The reform will see AP2’s mandate diverge from those of AP3 and AP4 in some respects. AP3 and AP4 have their cap on the percentage of a listed Swedish company they are permitted to hold raised to 3%, while for AP2, this cap will remain at 2% – though the overall cap of 10% on the voting share of a company the funds can own remains.
AP2 will have a higher cap on the proportion of illiquid assets it can hold, with this being lifted to a maximum of 50%, from the 40% cap which will remain for AP3 and AP4.
Following the transfer of assets, AP3 and AP4 are set to manage some SEK800bn each, though according to the reform plan, the government can decide if some of AP1’s assets should be managed separately. If so, such assets are to be managed by AP4 only.
Meanwhile, AP2’s total assets are set to increase to SEK536bn, meaning it will be significantly smaller than the Stockholm-based funds, and its portfolio will be more heavily weighted towards private equity to begin with.
Two special investigators are to be assigned to assist the AP funds concerned in implementing the reorganisation.
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