Sweden Post is one of number of major Swedish employers to make the move to set up a pensions foundation to fund pension liabilities that it carried as book reserves. As with the other groups, the financial implications of the move were paramount in its thinking.

Before the foundation was established, the group balance sheet presented an unusual picture. If the huge balances of the Postgirot settlement bank were excluded, about half of the organisation's Skr21bn ($2.6bn) assets were to cover pensions liabilities, matched by Skr6bn of real estate and liquidity of Skr4bn.

As senior director of finance Dag Hasslegren says: If you looked at us from the liability side we could be compared to an insurance company, while from an asset side, we could be regarded as a real estate company with surplus cash. One of our main reasons was to have a healthier profit and loss account and balance sheet."

In an environment of reducing interest rates the change could enable it to obtain finance more cheaply in the capital markets as a state-owned company. Also the group equity ratios would improve. By reducing the balance sheet figures from Skr21bn to Skr15bn, the equity ratio would go from 16 to 27%, say Hasslegren.

He adds: "As a cash generating business, we wanted less liquidity, as we believe that from management point of view you should not have more cash than you need for the business." Additionally, a foundation provides the opportunity to hold investments appropriate to the pension liability needs, something it is difficult to do within a corporate balance sheet.

So the Postens Pensionsstiftelse was set up mid-1997 on a closed-fund basis to look after the supplementary pensions obligations incurred up to the end of 1996. "The assets were transferred over a six-month period and were a combination of liquidity and assets - about half and half," says Lena Djurberg, who recently moved from the Sweden Post staff finance department to become investment manager of the foundation.

"The main investment aim of the fund is to gradually reduce the real estate and to replace this with equities and securities." The allocation strategy is to match the pension payment demands on the fund (an in-depth asset/liability study was done up to 2056 to assess these), by bonds and short-term assets with the remainder in equity and real estate. "But at each year-end we must be fully funded, which does not give you much leeway," she points out.

Earlier this year, the first equity foray was a Skr500m tranche, placed with three asset managers, 20% in domestic holdings with a Swedish manager and 80% on a global basis, with two non-domestic groups. These were chosen after an extensive search from a short list of 10, with the help of consultants. The chairman of the foundation is Michael Sohlman, executive director of the Nobel Foundation, who is well placed to advise on the investment side.

"As we invested this money in May, we will have a deficit on this, but it was put into the market on a long term basis so we are not worried," says Hasslegren, adding that the fund may consider some fresh equity moves some time next year.

The Skr4bn in short-term assets are run by the Postgirot bank, but on a third party mandated basis, points out Djurberg. She sees the duration of the portfolio increasing. "We have not gone longer term as we were waiting for fuller information about our liabilities. The aim will be to match the duration of the assets and liabilities."

Recently the fund sold off one of its properties, a city centre block, for Skr1bn. Ultimately, real estate could come down to 15 to 20% of assets, though this will depend very much on market conditions.

A current project for both of them is to examine the question of whether Sweden Post should set up a second foundation to cover the liabilities building up since the end of 1996. "At the moment these are being held as book reserves, but with a workforce of around 50,000 they build up quickly by Skr600m or so each year," says Hasslegren.

He has no doubt that the most important aspect of setting up a foundation is the asset/liability study. "When you find the underlying structure, then the asset allocation falls out from this." But Djurberg warns: "It is very long drawn out and tedious process."

And he stresses the importance of meticulous preparation. "Because of the huge sums of money involved there has to be detailed planning. It has to be run as a serious project with good people.""

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