AP7 uses its internet trade reporting system to benefit savers
The Stockholm-based Seventh Swedish National Pension fund, the AP7, describes itself as “a fund option for the entire nation”. Set up just over two years ago, it is different from the other six national pension funds that form part of the restructured state pay-as-you-go (PAYG) system.
Firstly, AP7 is a mutual fund company, covered by the mutual fund act, with a defined contribution saving structure as opposed to the traditional defined benefit PAYG funds the other national funds offer. Secondly, AP7 also acts as the default fund in the defined contribution, PPM system.
AP7 was established to offer sound, professional asset management to people who didn’t exercise their option to invest their pension money in other private funds under the PPM system or who actually prefer to have it handled by a public asset manager.
With assets totalling some €2.1bn at present, AP7 currently covers some 2m people or 30% of the Swedish working population – a huge responsibility.
The fund has a global asset allocation strategy with a heavy socially responsible investment (SRI) bias, a factor that led to the high-profile sale of its shareholdings in 27 different companies in one go last year for failing to meet the fund’s strict SRI criteria.
It invests 65% of its assets in international equities, 17% in domestic Swedish equities, 9% in domestic and international fixed income and the rest in alternatives – private equity and hedge funds.
The Swedish government handles the distribution of the AP7 through a specially designed network it created for the national pension fund system. The fund has an administration structure it believes to be quite unique among pension funds, especially from a technical perspective.
AP7 was created at a time when many pension funds were reviewing the way they actually do business.
Starting afresh the fund was able to put into place a new and innovative administration structure to keep costs low and allow the fund to track its investment history with practically no trade errors.
The structure centres on real-time trade transactions and broker reporting using a system called TradeseC by TradeChannel AB. The system basically requires any manager or broker within the AP7’s portfolios to report any trades executed within 15 minutes of execution. This effectively allows AP7 to monitor, control and keep a near perfect record of its portfolio holdings.
The reporting system is internet-based and the fund says using the internet this way cuts out a lot of paper-pushing, time and money. The conventional way of receiving and sending faxes was not only time consuming, but cost money in terms of both materials and staff, and was error prone. The new reporting system offers a quick, effective and efficient solution that cuts out the middle-man.
AP7 says it doesn’t know of another fund that uses such an internet reporting system quite so efficiently and within such strict timeframes.
AP7’s administration solution also allows greater investment flexibility and efficiency. All instructions given to the custody bank are generated by AP7 and not, as is usually the case, by external managers directly. This gives them an advantage in negotiations with both managers and custodians. As 80% of the fund’s assets are outsourced this is the perfect way to monitor and control portfolio movements efficiently and reliably. Once AP7 is aware of a manager or broker’s moves and its NAV position, they are free to carry on investing. The system practically allows a real-time turnaround.
But it’s not just in trade reporting that the system allows a higher level of efficiency. AP7 points out that there are just four people, one of whom is an IT expert, working on all areas of trade reporting at the AP7.
In essence, the fund is combining the middle and back office operations in one, not to mention cutting out the broker/manager custodian relationship that can often be time consuming and unnecessary for pension funds.
AP7 has yet to experience any drawbacks or problems with the system, just greater control and flexibility and the saving of both time and money on both staff costs and manager fees.