Sweden’s main national pensions buffer funds — AP funds one to four — are set for big changes to their long-berated investment restrictions next year after the government formally proposed a package of liberalisations.

The Swedish finance ministry has announced a number of draft changes including a new 40% ceiling on illiquid investments in place of the current 5% lid on unlisted instruments, with the new allowance to include real estate – which is unlimited under the current rules.

The proposal also includes a reduction in the minimum allocation - from 30% to 20% - to interest-bearing securities with low credit and liquidity risk that the funds must have, abolishes the rule that 10% of their assets must be managed externally, and removes the funds’ option to invest in commodity derivatives.

Per Bolund, financial markets minister, said: “Over time, investment patterns change and therefore we also need to review the investment mandates of the first four AP funds.”

The ministry said the proposal was also aimed at strengthening and clarifying the regulations on the funds’ sustainability work.

The draft rules put a focus on sustainability into legislation for the first time and clarify the connection to Swedish environmental goals as well as to international agreements, it said.

“With this proposal, I am convinced that the AP funds will reduce the environmental impact of their portfolios and place themselves in the absolute top layer in terms of sustainability,” Bolund said.

“This is necessary if the Paris agreement and the objectives of Agenda 2030 are to be reached,” he said.

The wording of the funds’ investment guidelines is to be changed to state that a maximum of 40% of the funds’ assets can be held in illiquid investments, replacing the current text which limits investment in unlisted instruments to 5% of assets.

According to the draft, the funds will not be required to sell illiquid investments if strong market movements — for example, a sharp fall in the price of listed securities — force the proportion of illiquid investments above 40%, saying that such a requirement could be detrimental to pension assets.

The proposal also says the funds must work together on responsible investment and develop guidelines jointly, and that they must work to become exemplary in the field of sustainable investment.

Back in May, when Bolund talked about the plan to relax investment restrictions, AP2 said the move would be positive because the return levels the fund had achieved historically would become increasingly difficult to attain under the current regulations.

Niklas Ekvall, chief executive of AP4, said the fund welcomed the proposal. 

“A modernisation of the current investment rules will give us better prospects of achieving our long-term return goal and therefore of fulfilling our mission within the pension system,” he said.

“Apart from having greater freedom in the choice of investments, it is also crucial to have enough flexibility so that investment can be carried out as cost-effectively as possible.” 

However, Ekvall pointed out that the proposed new 40% ceiling on illiquid investments would include real estate investments.

The proposal has come from the cross-party Pensions Group and the deadline for consultation responses is 26 October.

The new rules are scheduled to take effect on 1 July 2018.