The Swedish Finance Ministry has tasked pensions expert Mats Langensjö with devising a new framework for the country’s largest public sector pension fund.
AP7 is the manager of the default option within the defined contribution (DC) segment of the state pension, known as the Premium Pension System (PPM).
Langensjö – who has played significant roles in several pension reform processes in Sweden – is considering all options for the fund, including expanding its investment universe as well as changing its use of leverage.
He told IPE: “AP7 has been around since 2000, but nothing has really changed since then in terms of the framework.
“It was set up at a time when there were no other investment options in the first pillar system, then later it became the default option and now it is a fund in excess of €50bn because more than two thirds of savers have chosen to stay in it.”
AP7 was the most rapidly growing investment fund in the world, he said, which meant the framework had now to be changed. According to data from IPE’s Top 1000 Pension Funds survey, it has grown from €8bn in 2009 to almost €62bn as of last year, as a result of investment returns and policy reforms.
Langensjö’s report is likely to be submitted by the summer and will probably be put out for consultation later this year as part of the second stage of the PPM reform that is currently under way.
Just over 13% of Swedish individuals’ state pension contributions – equating to 2.5% of salary – are directed into the PPM, which allows people to put their money into a wide range of private investment funds or into the default option, the balanced Såfa fund run by AP7.
In compiling his report, Langensjö said he would look at what the future role and objective for AP7 should be as the default fund.
“The big balancing act is between the implied or expected cautiousness of pillar one and how you maximise pensions”
“Having this kind of structure in the first pillar system is rare, as there are not many such systems that rely on market returns – in fact, I haven’t come across any others where this is the case,” he said.
“So the question is, how do you then position that? It is a given that the structure is there, but what is the appropriate level of risk and appropriate objective, particularly for the savers?”
Other issues that needed to be resolved in the report included defining the target group for the default fund.
“In one sense you are targeting the whole population of Sweden, but maybe you need to prioritise certain groups such as people who are younger, older, or have different earnings levels,” he said.
New investment guidelines?
Langensjö said he would also consider whether AP7’s investment universe should be updated, as a consequence of the objectives and risk profile.
AP7 currently invests more than 80% of its portfolio in equities, but its leadership has called on the Swedish government to broaden investment rules to allow real estate and infrastructure allocations.
In his report, Langensjö said he would also address AP7’s use of leverage.
He cited Nobel Prize-winning economist Richard Thaler, who last year stated that AP7 should not apply leverage to its investments, but Langensjö said there were good arguments for and against the use of gearing.
Langensjö refused to be drawn on the specifics of how the investment universe might be altered.
“It is too early in the process to say, but the big balancing act is between the implied or expected cautiousness of pillar one – the social security approach – and how you maximise pensions, which in simplistic terms is to maximise risk,” he said. “In the end that will define the investment universe and the type of portfolio.”
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