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IPE special report May 2018

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AP fund reforms undermine 'strongest competitive advantage' – Langensjö

Proposals to reform Sweden’s SEK1.2trn (€126bn) AP fund system could see it unable to act as a long-term, buy-and-hold investor, the chairman of the Buffer Fund Inquiry, has warned.

Mats Langensjö told IPE he was “disappointed” a number of the proposals put forward in his 2012 report on the reform of the buffer fund system were not adopted by the government when it unveiled its consultation last week.

The consultation, launched by the left-leaning coalition government after agreeing a joint stance with the main opposition parties, recommended the closure of AP6 and the consolidation of all unlisted assets into what is currently AP2, as well as the closure of a second, as-yet-undecided buffer fund.

But the consultation dropped several of the ideas suggested by the initial inquiry, including a strengthening of internal governance.

“Our proposals were not rocket science,” Langensjö said. “We tried to find good examples from all over the world and implement good global practice into a Swedish context – and that’s where I’m disappointed.”

Under the government’s proposals, a reference portfolio decided upon by a principal will be used to steer the remaining three buffer funds’ investment strategy.

The principal would sit within a newly created National Pension Fund Board, but the government could potentially exert influence over the system’s investment strategy if it does not approve of the level of investment risk suggested by the principal.

This would run counter to Langensjö’s hopes that the principal could oversee a more “flexible, dynamic” investment approach among the buffer funds.

The reforms could also see all AP fund employees become civil servants, with an end to an incentive-driven pay structure.

“If you have something called a reference portfolio, and if you then have very little organisational incentive to actually deviate from that, then there is a risk that it becomes a very passive index portfolio, by nature, over time,” Langensjö said.

He also argued that the new reference portfolio could see the AP funds fail to employ their “strongest competitive advantage” as true long-term investors.

“They don’t have short-term liquidity requirements,” Langensjö said. “They can be buy-and-hold, they can take illiquid positions, they can deviate from market volatility.

“When other people are forced to sell, they can be buyers.”

He added: “Part of their assets will be perpetual, so why don’t you have a perpetual investment philosophy or strategy for half the portfolio – then you can have an illiquid and a liquid portfolio.”

Two of the AP funds, AP1 and AP3, were recently part of a SEK60.6bn consortium to buy the energy distribution arm of Fortum, the country’s second largest.  

AP3, one of the three Stockholm-based AP funds under threat of closure, said there was little evidence the proposed changes would lead to any improvement.

Kerstin Hessius, the fund’s chief executive, said the current system worked well and that the funds had “exceeded expectations”.

She added that the reform could put the pension system at risk, and reiterated that there was only a need for the system’s current quantitative investment rules to be amended. 

The four main AP funds were all seeded with equal amounts of capital upon launch.

As of the end of last year, AP4 was the largest, at SEK295bn. 

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