SWEDEN - A review of Sweden's AP funds has recommended the abolition of current quantitative investment regulations, replaced with the prudent person principle in order to boost performance, governance and flexibility of the country's buffer system.

Headed by chair Mats Langensjö, the review of the four main AP funds as well as AP6 suggested the creation of a new authority with overall responsibility for the five buffer funds' current SEK871bn (€97.5bn) in assets. The new pensions reserve board, or Pensionsreservstyrelsen, would be the asset owner and responsible for setting the targets of the funds.

The inquiry also recommended reducing the number of funds from five to three, with AP7 excluded from the review's brief.  

The inquiry board argued that the lack of a clear principal or asset owner with a unified role, appropriate investment guidelines and the fact that the funds set their own targets according to which they managed assets resulted in cost increases and reduced overall returns.

In order to strengthen the buffer funds links to Sweden's pension system, targets would in future be set in conjunction with Pensionsmyndigheten - the Swedish Pension Agency - which administers the national defined contribution system PPM. The remaining three boards of each buffer fund would, in turn, have identical mandates to maximise return within the risk parameters that the new reserve board and pension agency sets.

Langensjö said that creating a better governance model for the management of the assets and clarifying the division of responsibilities between the owner and the asset manager had been key for the inquiry.

The suggested governance model would create a clearer division of responsibilities between the owner of the buffer capital and asset managers, as well as a clearer framework for the accepted risk in the management of the investments, he added.

An improved governance model would also allow for the replacement of existing quantitative investment rules with a more "appropriate" prudent person principle - to improve flexibility for the asset management of capital and thereby benefit the pension system in general, the report said. As a result, the asset management could therefore be developed and adapted to current circumstances on the capital markets and the financial position of the pension system at any given time, it said.

Langesjö said in a statement that the current quantitative investment rules were adopted at a time of different market conditions. "Today they are working against the original purpose of limiting risks in the asset management at a significant cost for existing and future pensioners.

"More flexible investment rules require, however, a clearer framework for acceptable risk for the asset management operations which does not exist in the current system but would be achieved with the implementation of the recommendations of the inquiry."
The prudent person principle would also abolish the need for specialised investment mandates within the system which would mean that AP6, which currently only invests in private equity, would be integrated with the three new funds.

The inquiry board said it became clear over the course of the review that further improvement was needed to allow for more efficient asset management of Sweden's pension reserve assets, but that recommendations regarding such changes fell outside the remit set by the department of finance - which stipulated that the buffer fund system should be reduced to include at least three funds.

These additional recommendations falling outside of its remit were covered separately and according to seven of the nine enquiry board members should have been included in the main report.

Langensjö said the recommendations presented were the best possible solutions within the constraints of its mandate.

Former AP7 chief executive Peter Norman, now minister for financial markets, said he hoped the report would lead to a broad and unbiased discussion in the complex issue.

The review was commissioned as the current governing regulation had remained unchanged for a decade, with the goal of capitalising on the experience gathered during that time implementing changes needed due to the evolution of capital markets.

The proposals will be sent out for consultation during the autumn and reform proposals will be prepared in conjunction with Pensionsgruppen, the working group on pensions consisting in five national parties that launched the pension system two decades ago.

The suggestion to consolidate the country's buffer funds may not come as too great a surprise, with review's initial brief suggesting that the closure of as many of two of the funds could be a result of the review.

The OECD's own contribution to the report recently suggested that investment restrictions had been hampering the system's returns.