AP funds told to review costs and operations

SWEDEN - The Swedish government has launched a review of the Swedish AP funds' costs management in light of last year's poor investment performance, which suggests the merger of some operations has not been ruled out.

In a letter presented to parliament by the finance ministry, Mats Odell, minister for local government and financial markets, has challenged whether active management delivers the returns long-term and suggested the AP-Fonden should "explore the possibility of co-ordinating common functions".

He recognised some of the losses could be explained by turbulent market activity in light of the credit crunch but said the results of active fund management were "generally weak" and argued the funds' practices could be improved to gain efficiencies and more secure returns.

"Although most of the decline in 2008 can be explained by the financial crisis, the of the AP fund's asset management is not satisfactory," said Odell.

"It is high time that the AP funds review their cost base in order to safeguard the buffer capital and avoid further deterioration for pensioners."

More specifically, the finance ministry said an international comparison of the AP funds  found AP1-AP4 "did not devote the same impetus to strategic issues compared with other funds in the world", and added "the Swedish funds have not had a return that is significantly worse in the last five years".

The comments follow an evaluation of the national pension buffer funds, which revealed AP funds 1-4 and AP6 collectively lost SEK194bn (€18.2bn), or -21.6% in 2008, which represents a real return of 1.9% a year since 2004.

Within this comparison of returns since the second half of 2001, active management was said to have represented 25-50% of costs, and overall costs were SEK7.4bn. Strategic decisions were also said to generated SEK104.7bn while active management also lost the AP-Funds SEK8.5bn, to give an overall return since 2H 2001 of SEK89bn,

The government recognised some AP funds have already taken action in response to the recent crisis and are reviewing their strategic decisions.

The government is required by law to hire external expertise to prepare AP funds' financial statements and evaluate their management, and McKinsey was called in this year to help with the process.

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