AP7 New directive leads to overhaul
It is probably fair to say that most pension fund managers are glad that 2009 is coming to an end and are looking towards 2010 with hope and apprehension rather than excitement. In Sweden there are, however, at least two pension fund professionals who are excited about the future.
Peter Norman, executive president and Richard Gröttheim, executive vice-president of AP7, the Seventh National Pension Fund in Sweden, are in the midst of implementing a new government directive which will see the existing AP7, and its two funds, scrapped in favour of a new single fund.
AP7 currently manages the Premium Choice and Default funds, both of which will be replaced. One of the changes is that the default fund, which you could not actively select as an investment option nor choose to opt into again if you left once, will be given the characteristics of a ‘generation' or life-cycle fund, for those who do not make a selection. But it will also be fully selectable as an investment option, with varied risk profiles. Gröttheim says there have been talks about the generation funds for many years but until now there had not been enough capital in the system, because of its fairly recent start, to launch them.
The changes to AP7 will also make it possible for those who earlier made active choices to go back into the government option. All existing savings from the default fund will be moved to the new alternative during May 2010, and investors will be told of the new options, or they can make a choice of any of the other funds in the premium pension system. The assets from the Premium Choice fund will be divided between all the funds in the system, just as when any other fund is liquidated.
In effect, there will be two different government options - one for those who do not make an active selection, and one for those who want to make an active choice but want to stick with the government offering as a low-cost alternative to the commercial providers. The investors who are put in the government option by default - in other words, those who do not make a choice - will have their assets placed in a fund where the risk profile will be automatically assigned and correspond to their age, as well as the total risk of the person's entire old-age pension. Investors who actively choose the new set-up will, however, also be able to select their risk profile. Therefore, they will not be assigned to the generation or life-cycle fund alternative.
"The risk profiles will be low, medium and high risk," says Gröttheim. "You have to remember that the premium-based pension is only a small part of an individual's total pension assets and therefore the risk budget on this small portion can be higher than for the rest of the pension.
"We are currently ironing out all the details but we want to offer a government alternative with different risk profiles and because of the economies of scale we have, this will be a low-cost product." AP7 will be able to offer one of the most cost-efficient products within the system, with a fee of 0.15%.
From May 2010, AP7 will be managing an equity fund and a fixed-income fund. The new funds will not be traditional generation funds. Instead, investors will be invested 100% in equities until the age of 55, after which the proportion of bonds will be increased gradually. "What is different, compared to generation funds in the private sector, is that we have the high equity allocation for much longer. But after 55 we will rebalance the equity-bond ratio every year until retirement. This innovation is something we have worked hard to achieve," says Gröttheim.
At this stage there will not be any changes to the AP7 fund management roster, Gröttheim notes. Having implemented alpha-beta separation for the existing AP7, and instructed managers accordingly, the new structure will also include this mechanism, he adds. Also, the fund will continue with its clean-tech initiative, investing in this sector through private equity products.