Sweden’s four main buffer funds have increased co-ordination since the failed system change in 2017

Key points

• Sweden’s buffer funds, AP funds 1-4, have increased their co-operation since 2016 
• This has intensified following the  collapse of buffer fund reform
• AP funds say internal competition has led to the cost-efficient management of assets
• Current reform calls for the funds to ‘progressively develop their co-operation’ within sustainability

Sweden’s national pensions buffer funds — AP1, AP2, AP3 and AP4 — have grown to the point where they constitute 15% of the national pension system. But the funds – which were designed to act as a buffer for state pension payments – have been the object of constant debate since their formation in 1960 (see panel).

A large part of that discussion has been about whether it makes financial sense for the buffer capital to be divided between competing funds or unified to reduce costs.

In the last two years, the funds have taken elements of the latter argument into their own hands and boosted how they work together.

Since 2016, the chief executives of the four buffer funds have directed greater focus on co-operation between the funds, they say. The aim of this drive, they say in a joint response to IPE, has been “to achieve greater cost efficiency, creating synergies and ensuring a relevant exchange of experience, knowledge and work methods between the organisations.”

The attention the funds have been paying to inter-fund co-operation began after a long reform process was halted in 2015 because the cross-party Pensions Group failed to reach agreement. Plans on the table at that time had included the idea of closing two of the funds — which total five including AP6, which invests solely in unlisted equity.

Ideas voiced earlier in the process had included merging all the buffer funds into a single unit in order to fully benefit from economies of scale. The new co-operation drive between the four largest buffer funds, is being conducted via established forums, the AP funds say.

A formal co-operation council was set up in 2016. The funds’ chief financial officers and chief operating officers are represented, with an objective to encourage and co-ordinate co-operation efforts.

sweden’s ap buffer funds

The buffer funds say their co-operation should be seen in light of having four independent funds. “Through four independent buffer funds with the same assignment, an efficient and fair competition has arisen and led to cost-efficient management of the pension assets,” they say, citing an international comparison conducted in 2017 by the ministry of finance with the help of McKinsey and CEM Benchmarking, in which the AP Funds stand out as cost efficient.

The fact that there are four independent funds has also resulted in the economic power — which the fund capital involves — being spread and not becoming too concentrated, they say.

Having contributed to diversification and flexibility, the funds say this structure, which was established in 2001, has served the system well.

But in areas where there is no risk of inhibiting competition the funds say they can work together to reduce costs and use resources efficiently. 

While not as far-reaching as the buffer fund reform plans that were abandoned, the AP funds find themselves on the verge of changes to their legislative framework. In a July 2017 memorandum, the finance ministry set out a series of changes to the mandate for AP funds 1-4 including various liberalisation schemes involving the types of asset they may invest in and the limits on those. The memorandum, which was included in a package of measures comprising pension reform, and approved by the cross-party Pensions Group in December, specifically addressed the issue of co-operation between the funds in the area of sustainability.

The funds, according to the memorandum, should “progressively develop their co-operation further based on the needs they have in the field,” in addition to the provisions of the existing legislation on public pension funds. “The goal should be to achieve increased efficiency and cost savings in terms of exemplary management through responsible investment and responsible ownership,” it says. The area of sustainability links with what the funds’ describe as their most extensive co-operation — that within the Council on Ethics of the AP funds, a collaborative body set up in 2007. 

The council consists of two to three representatives from each fund and a common secretary general. 

It co-ordinates the funds’ work on environmental and ethical issues.

The main areas where the funds do co-operate are as follows:

• Environment and ethics (including conducting joint dialogues with foreign listed companies; sharing experience and co-ordinating suitable indicators for climate risk; and joint stakeholder dialogues)

• Corporate governance (voting platforms)

• Legal and compliance (rules and regulations, tendering processes, filing)

• Finance (accounting)

• Back office (systems, custodians, clearing houses)

• IT (system administration structures, tendering processes, licences, application solutions)

• Risk control and performance (systems, methodologies, information exchange)

• HR (salary mapping, development programmes for specialists at the AP funds)

• Communication (joint knowledge-building seminars, external activities for students at technical and business colleges)

AP6 and AP7 — the national pension fund which provides the default option in the premium pension system — are also part of these groups, the AP funds say.

Sweden’s approach to supporting the state pension 

The system of separate buffer funds to support Sweden’s state pension came into being in 1960 alongside the creation of the ATP (general supplementary pension) — an extra state pension to bolster the existing system. 

The National Pension Fund’s First, Second and Third Fund Boards were established to secure the long-term savings required by ATP. At that time, the fund boards were only allowed to invest in fixed-income. Asset management in the three fund boards was co-ordinated in a single organisation.

In 1974, a fourth AP fund was established. This was permitted to invest in equities.

A fifth board was formed in 1988, which was also allowed to invest in equities, and in the same year, the first three funds boards were given less restrictive investment rules, and allowed to include real estate.

The sixth AP fund was created in 1996, using the assets from the discontinued wage-earner funds, which had been managed by a liquidation board previously. The new fund was permitted to invest in equities and risk markets and focused on small to medium-sized companies.

Two years later came the 1998 pension system reform, enacted in 2000, under which the fund boards were renamed the First AP Fund, the Second AP Fund, the Third AP Fund and the Fourth AP Fund. 

The Sixth Fund Board and the Seventh Fund Board — which had been established in 1998 — were also renamed the Sixth AP Fund and the Seventh AP Fund. The Fifth Fund Board was disbanded.

In 2001, legislation was passed, establishing the current AP Funds via a transfer of SEK554bn (€53.6bn) from their predecessor bodies. They were each given the same mission, investment rules, and capital. They were allowed to invest globally and increase their exposure to equities. At this point, the funds accounted for 10% of the pension system.

By 2013, the combined assets of the funds had grown to over SEK1trn, accounting for 13% of the pension system assets.

In 2014, the Pensions Group published recommendations to reform the system, but this was rejected at the end of 2015.

In 2017, the Swedish government set out proposals for changed investment rules for AP Funds 1-4.