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Buffer fund reform could 'destroy' successful system, AP4 warns

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Sweden’s AP4 has warned that reforming the country’s buffer funds will put the system at risk of political interference and could damage future returns.

Managing director Mats Andersson, speaking out as his SEK310bn (€33.1bn) fund announced half-year returns of 6.1%, said it was “disappointing” to face reform proposals that would see the closure of private equity fund AP6 and a second, undecided buffer fund.

Andersson said the proposals, yet to be subject to an impact assessment after they were agreed by the cross-party Pensionsgruppen, “disregarded the achievements of the current AP funds”.

He added: “There is an obvious risk [the proposals] will destroy an effective organisation that has successfully grown the pension capital [to] SEK1.2trn.”

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In its annual report, AP4 warned about the number of “unresolved” risks within the proposals put forward last month, including greater risk of standardisation of investments, short-sighted behaviour and political interference with the AP funds.

The new system would see ownership of the assets transferred to a principal sitting within a newly created National Pension Fund Board, which, in turn, would set investment strategy by setting a reference portfolio to guide the funds.

The Swedish government could potentially amend the reference portfolio if it felt the funds were taking on too much investment risk, opening the door to political interference.

AP4 also warned that a single board could result in greater standardisation of investments and an approach that would be akin to passive management, “which in time could lead to the risk of lower returns and lower pensions”.

The compromise agreement reached by Pensionsgruppen has previously been criticised by Mats Langensjö, who chaired the Buffer Fund Inquiry in 2012.

Langensjö told IPE  the reference portfolio risked undermining the system’s “strongest competitive advantage” to act as long-term investors.

AP4 pointed to the buffer fund system’s most recent annual report, which praised the levels of diversification among the funds, and welcomed a shift to medium and long-term investment strategies.

Over the past six months, AP4 said its real estate portfolio – accounting for 6% of assets – was the strongest performer, returning 13.7%.

Its Swedish equity portfolio returned 11%, compared with a 4.7% return from non-domestic shares.

It suffered a 0.7% loss from its fixed income portfolio, and saw its alternative asset portfolio return 3%.

At the end of June, 58% of the fund’s portfolio was in listed equity, 34% in fixed income, 6% in real estate and 3% in alternatives.

It achieved a real return of 6.2% over the last decade and 5% since 2001.

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