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AP1, AP2 call for more scope on direct investments

Two of Swedish national pension funds have called on the government to give them more freedom to make direct investments as part of the ongoing reform of their investment rules.

The Swedish finance ministry announced a package of changes to the rules in July, including a new 40% ceiling on illiquid investments in place of the current 5% limit.

In its response to the drafted new mandate, AP1 welcomed the proposal overall, and said the draft reform should be carried out.

“The overall direction of the proposal is that the investment rules should be made more flexible, which is positive,” it said.

The reduction of the proportion of assets to be held in secure interest-bearing securities to 20% from 30%, alongside the option to increase the allocation to illiquid investments, gave the AP funds a better chance of meeting the pension system’s needs, it said.

However, certain details in the proposed rules would hinder potentially high-return investments, while others would lead to higher costs for the AP funds or risk being rapidly outdated, it warned.

AP1 said the funds should be allowed to invest directly in unlisted shares instead of being forced – under the current and proposed rules – to invest indirectly via funds, property companies or venture capital firms.

“The regulations make it harder for the AP funds to make use of cost-effective cooperations with venture capital firms and other investors regarding investments in unlisted companies,” it said. Allowing this type of cooperation would lead to significant cost savings, it argued.

“[AP1] reckons, for example, that the fund could save around SEK300m [€30m] a year, without needing to build up a large internal organisation for direct investments,” it said.

Gothenburg-based AP2 also said it welcomed the proposal to allow higher allocations to unlisted assets, but said it gave less freedom in practice than it initially seemed to provide.

The fund also spoke in favour of allowing the AP funds to invest directly in unlisted assets by participating in investor groups.

It proposed the wording of the mandate be changed to expand the definition of venture capital companies – one of the vehicles through which the funds are obliged under the current draft to use as intermediaries for unlisted investments.

The definition should include vehicles co-owned by institutional investors, AP2 said.

AP4 has also spoken in favour of allowing direct investments, in response to the proposed reform, saying the new freedom should be supplemented with opportunities for direct investment in unlisted companies and credit.

AP2 went on to criticise the Finance Ministry’s stance on commodities, but emphasised that it did not necessarily see a big future role for the asset class in its portfolio.

The proposal continued the exclusion of commodities, AP2 said, adding that this ban was motivated by the assertion that it was morally unsuitable to invest in raw materials.

The fund said that, while it was hard to say if it was true that speculation on commodities prices led to higher food prices, it was clear that financial players had an important role in commodities derivatives markets, which ultimately helped producers expand their output.

“Against this background, [AP2] has difficulty understanding the proposal’s categoric attitude and exclusion of commodities derivatives,” it said, adding that the fund would prefer a more neutral approach.

AP3 has also made a formal response to the consultation, suggesting a range of additions and modifications.

It disagreed with the ministry on investment in infrastructure, saying this asset type fitted in well with the long-term mandates of the four main AP funds and played a key role in developing a sustainable society.

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