Sweden’s National Audit Office (Riksrevisionen) has recommended that AP7, the default option in the country’s national defined contribution pension system, end its involvement in active management.
In a recently published review of the buffer fund, the Riksrevisionen argued that active management had been of little benefit to the fund’s participants, and that the strategy was ill suited to the shorter investment horizons of those already retired.
The review also urged AP7 to continue to develop its internal supervision and controls and strength the independence of these functions, after noting “serious deficiencies” in the area.
The Riksrevisionen said savers in AP7 found it difficult to work out what returns they could expect, and pointed out that the fund was not subject to the same regulatory scrutiny as the other funds in the premium pension system.
It said fund AP7 participants were “vulnerable” due to a lack of external controls and supervision, and called on the fund to revise its statement of goals and develop a better means of evaluating its index management and leverage strategy.
Lastly, the audit office criticised the Swedish government for failing to focus on these aspects in its own reviews of the fund.
AP7 said the fund was working continuously to improve, and saw the review as an “incentive”.
And while it found some of the auditor’s recommendations as “reasonable and constructive”, it strongly disagreed on many other points.
It described the review as “regrettably misleading”, pointing out that its goal was first and foremost to ensure that those participants who do not make an active selection receive an equally robust pension as those who actively select funds in the system.
This goal, according to AP7, was not considered at all in the review, which was “surprising”.
While conceding that active management was a “difficult” area, it said the buffer fund had worked hard to find an efficient form of management that balanced risk and return.
It also claimed that its approach had outperformed more traditional forms of active management.
Since AP7 was launched in 2007, it has returned 52%, compared with 20% for the average saver who selects funds available in the system.
AP7 also pointed out that it was subject to comprehensive reviews and monitoring by auditors and the government, and maintained that it had always followed the laws and directives to which it was subject.
The fund refuted that there were serious deficiencies in its internal supervision and controls, and said it was sceptical of refining its statement of goals, adding that the audit office had provided no indication of what this should look like.
As of the end of 2012, almost 3m Swedes were invested in AP7, which has approximately SEK130bn (€14.6bn) in assets.