Sweden is making slow but steady progress in its overhaul of the AP buffer funds, writes Rachel Fixsen
Sweden’s pension buffer fund system is about to undergo a transformation – but not just yet.
The busy debate around the future of the AP funds has reached the chrysalis stage, following the publication in August 2012 of the inquiry launched by the government in 2011.
Led by industry expert Mats Langensjö, the inquiry had been tasked with studying the potential to improve the conditions for asset management in the system. The brief included an evaluation of the way the AP funds were managed, their mission and their investment rules.
In conclusion, the report recommended that the system be narrowed down from the five existing funds – AP1, AP2, AP3, AP4 and AP6 – to just three, governed by a new Pensions Reserve Board (PRB). AP7 is an exception and not addressed in the report, as its purpose is to be the state alternative to private pension options in the premium pension system.
The inquiry saw the framework for the AP funds’ approach to asset management as outdated and ultimately having a negative effect on the stability of the pension revenue they produced. The PRB would make asset management more efficient by adapting investment rules, structure and governance as well as SRI policy, according to inquiry’s report.
Although keeping a range of AP funds has been seen as creating competition and allowing more nimble investment, participants in the debate have pointed to the economies of scale that could be achieved by cutting their number.
The funds themselves had various views on the final report. Some said a PRB would decrease diversification, one said the inquiry addressed side issues rather than the main problems, and another asked why the one-fund solution had been sidestepped AP6, which the inquiry recommends abolishing, was silent.
The cross-party Working Group on Pensions has since been taking matters forward, by means of a series of inquiries held with interested parties. When it eventually drafts legislation to implement the reforms to the system, it seems likely to take on board most of the main inquiry’s recommendations.
But draft legislation is unlikely to appear in public before the September 2014 Swedish general election, explains Ulf Nilsson, Liberal Party MP sitting on the Working Group for Pensions. “We agree [Langensjö] has taken the right direction, but there could be discussions about some details,” he says. “It is important that there should be three funds and that these should be politically independent. There have been suggestions that there should be one, but we are against this.”
Langensjö himself says the conclusion the inquiry came to is “not rocket science, but rather good global practice packaged into a Swedish structure. We have proposed a clear governance structure with better investment rules, and a more efficient management model,” he comments.
When they were established in 1960, the first three funds were only allowed to invest in fixed-income securities. Though the fourth fund was permitted to include equities when it was set up in 1974, it was not until 1988 that the original three funds had their investment remit broadened.
Langensjö says there has always been a high level of sensitivity surrounding the AP funds because of their relative size in the Swedish financial markets. “I think a lot of that sensitivity is not relevant now because of the size they have grown to,” he says. “They are now invested globally, so their influence over Swedish companies is less of a threat than it was 20 years ago.”
Since the AP funds have such an important role in the pension system, they should have a more efficient management model, Langensjö believes: “The inquiry has been a starting point for discussion and I’m very interested to see where it goes.”
For Nilsson, the slow speed of the path towards reform is not a problem, but altogether appropriate. “It’s good that the changes are not going too fast because there are very complicated issues,” he says.