SWEDEN - The Seventh Swedish National Pension Fund (AP7) will take a new shape after May 2010 and management is currently ironing out details for the launch of its new equity and fixed-income funds.

AP7 currently manages the premium choice and default funds, both of which will be defunct and replaced by May 2010. One of the changes is that the default fund, which Swedes could not actively select as an investment option nor choose to opt into again once they left, will be given the characteristics of a ‘generation' or life-cycle fund for those who do not make a selection. This will now become fully selectable as an investment option, with varied risk profiles.

From May 2010, AP7 will be managing an equity fund and a fixed-income fund. The new funds will not be traditional generation funds and instead investors will be invested 100% in equities until the age of 55 after which the proportion of bonds will be increased gradually.

"What is different, compared to generation funds in the private sector, is that we have the high equity allocation for much longer. But after 55 we will rebalance the equity-bond ratio every year until retirement. This innovation is something we have worked hard to achieve," said Richard Gröttheim, executive vice president.

He and his colleagues are in the midst of implementing the new government directive, which will see the existing AP7, and its two funds, re-launched.

In effect there will be two different government options. One for those who do not make an active selection and one for those who want to make an active choice but want to stick with the government offering as a low-cost alternative to the commercial providers.

The investors who do not make a choice, and are placed in the government option by default, will have their assets placed in a fund where the risk-profile will be automatically assigned and correspond to their age as well as the total risk of the person's entire old-age pension. Investors who actively choose the new set-up will, however, also be able to select their risk-profile.

"The risk profiles will be low, medium and high risk. You have to remember that the premium-based pension is only a small part of an individual's total pension assets and therefore your risk budget on this small portion can be higher than for the rest of the pension. We are currently ironing out all the details but what we want to do is to offer a government alternative with different risk-profiles and because of the economies of scale we have, this will be a low-cost product," said Gröttheim.

AP7 will be able to offer one of the most cost-efficient products within the system, with a fee of 0.15%.

At this stage there will not be any changes to AP7's fund management roster, Gröttheim noted. "In the new structure, the bond portfolio will be 100% Swedish whereas the equity portfolio will be much more global than currently with less Swedish exposure," he added.

The proposal will also make it possible for those who have earlier made active choices to go back into the government option.

All existing savings from the default fund will be moved to the new alternative during May 2010. Investors will be told of the new options or they can make a choice of any of the other funds in the premium pension system. The assets from the Premium Choice Fund will be divided between all the funds in the system, just as when any other fund is liquidated.

For the full update on the AP7 overhaul see the November issue of IPE Magazine.