Sweden’s new pensions system is posing serious cost problems for the country’s Ministry of Finance, which could lead to the SKr700bn (E78.7bn) AP pensions and disability buffer fund shifting assets from predominantly domestic gilt investment into Swedish and foreign equities to cope with the future demographic burden.
The AP funds had originally been earmarked to pay around Skr335bn of its assets into the state coffers to part-fund the retirement system.
However, revised budget calculations by the ministry show that under the proposed commitments the entire AP-funds would be exhausted by 2025 - leaving the pensions system without a life buoy in the event of financial difficulty. A lower than expected real interest rate in Sweden and higher life expectancy is being blamed for the future fund shortage.
Bo Könberg, member of the Swedish parliament for the country’s liberal ‘Folk Partiet’, says the debate is whether to decrease the proposed amount taken from the AP funds.
“The problem is that the government is also being hit by new commitments to pay for pensions benefits for the sick and unemployed, and the old projections for the AP funds were made on demographic projections from 1994, which have significantly altered. We are now deciding if these new projections mean we should pay less of the AP funds money to the pensions programme, which I believe we should.
“The other argument is over liberalising the investment criteria of the AP fund, and we believe the fund should switch from its predominance in Swedish government bonds to domestic and overseas stocks. This would guarantee its future survival.”
Should the system be adopted under the current plans, then a ‘breaking’ mechanism reducing outgoing pension levels in the event of a shortfall has been mooted.
Anders Rahmn, head of planning at the AP funds, says: “We believe the amount taken from the fund is likely to be smaller than the Skr335bn suggested. “And I do believe we will see a more flexible investment regime introduced. At present the Skr600bn which covers the first three Swedish funds is invested to around 5% in property, 7% in foreign fixed-income, with the remainder in Swedish bonds.
“But the remaining Skr100bn for the last three funds is wholly invested in equities,” he adds.