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Sweden’s buffer funds come out swinging

Future-proofing the Swedish pension system is a key item on the political agenda, following the conclusion of a review of the AP buffer funds commissioned by the department for finance and one by parliament.

The conclusion of the recent government review appeared clear from the word go. Setting out the parameters of what would become the report overseen by Aon, Mercer and Goldman Sachs veteran Mats Langensjö, the finance ministry called for the retention of at least three of the five examined AP funds, managing a combined SEK908bn (€103.5bn) and used to fund shortfalls in the state pension system.

Its request clashed with the eventual majority opinion of the review’s board, which instead argued in favour of AP1-4 and AP6 merging to create a single entity, thereby reducing management costs and offering other benefits of scale. However, despite the board’s inclination towards consolidation, Langensjö’s eventual report accepted the three-fund solution as the way forward, highlighting the brief set by government.

Not long after the AP funds collected their thoughts and offered an official response, several Swedish MPs published the Riksdag committee’s review of the buffer system’s performance over the past decade. Including calls from some MPs for an increased focus on environmentally friendly investments, the report only served to create an impression of a buffer system under intense scrutiny across the political spectrum.

In their responses to the Riksdag Langensjö-headed enquiry, the buffer fund chairman sought to argue strongly in favour of their continued existence.

Urban Karlström, chairman of AP1, said aspects of the proposed Pensionsreservstyrelsen – a board charged with setting the fund’s targets and the ultimate asset owner – was only “to a certain extent” a good idea, and that the individual buffer funds should still be left with the autonomy to invest and select asset managers as they saw fit.

AP2’s response was more critical, stressing that it was “too simplistic a conclusion” to argue that problems with asset allocation could be solved if powers were centralised in the new board. AP4 meanwhile argued that precisely such a centralisation could lead to a herd mentality among the funds.

Separately, Riksdag committee member Jonas Eriksson, an MP for the country’s Green Party, urged an increased environmental focus and for AP funds to stop investing in fossil fuel-heavy companies.

He noted that environmental issues of the funds’ investments had been a topic for debate within parliament for many years, and that the recent report showed that it remained topical.

Eriksson said the funds had done “great” in improving aspects of social and environmental investment. “But they still have investments that have been criticised by environmental and human rights organisations around the world.”

The MP added that he doubted the Swedish public would like its pension money to be invested in ventures that, in the longer term, had a negative impact. “We want them to make good money,” he said, “but we want them to make ‘good’ money.”

“There would be a bigger impact if the funds put their money in renewable technology companies and if other countries followed, instead of investing into the traditional heavy oil and gas business.”

Despite the committee’s reluctance to back the changes Eriksson called for, general support by the Left Party and the Greens’ role as the second-largest opposition party should ensure the debate continues.

 

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