Sweden’s financial markets minister tells Pirkko Juntunen that the government is preparing for comprehensive pension reform
Per Bolund, the Swedish minister for financial markets and housing as well as deputy minister for finance, is stepping up his sustainability game on several fronts, including pensions.
The reform of the country’s defined contribution platform or Premium Pension system, formerly known as PPM, was high on the agenda following some high-profile fraud cases.
The system was criticised for resulting in mediocre pensions at high costs for the majority and, indeed, the vastly varying pension outcome depending on choices made, arguably through uninformed choices. The aim of the reform is to make the system simpler, safer, cheaper as well as sustainable.
So far, Bolund, who was elected in May as one of two leaders of the country’s Green Party – so-called spokespersons – is happy with the reform progress and in particular with the clean-up of the fund platform. A newly created fund department of the Swedish Pensions Agency, the administrator of the system, has been tasked with introducing quality control and stricter rules for providers.
“The removal of providers which did not look after the best interest of the savers was vital for the stability and safety of the system,” Bolund says. He adds that another key element is the sustainability requirements of the providers. This has helped make it easier to choose funds with sustainability features.
Not everyone is happy with the reform or the premium pension system. The Left Party has suggested that the entire system should be scrapped because most people do not make an active choice from among too many funds and instead the assets end up in AP7, the government default fund in the system. Bolund insists that the first step of the reform has already improved consumer protection but expects the second phase to go further.
On the question of people that make the ‘wrong choice’ and end up with poor pensions, Bolund says ‘wrong choice’ is a broad concept but says the system as a whole has delivered good returns, improving pensions for the majority. “It is inevitable that there will be some unfortunate choices by some, but as the system is further reformed and becomes a professionally procured platform, these issues will be minimised, if not abolished,” he says.
The second phase of the reform, expected to be implemented by the end of 2020, will have the fund department selecting the funds that are available within PPM, which is expected to further cull the number of funds available.
Bolund is no longer responsible for the premium pension system. That responsibility now lies with Annika Strandhäll, minister for social security, but he has played an integral part in looking into how to restore faith in the system.
In 2017, Stefan Lundberg, a director at Cardano, the investment research and consulting firm, was commissioned to review the system and come up with proposals. One of the main actions was to introduce quality controls to both improve the offering but also weed out unscrupulous and fraudulent funds.
This is why the new fund department was set up. It is headed by Erik Fransson, former head of global distribution at SEB Wealth Management. In addition, Christian Lundström has joined as head of fund selection and compliance unit, joining from the Ministry of Finance. He has fund selection experience in the private sector.
As the reforms of the premium system are under way, Bolund is also awaiting the results of the review of AP7, which could include relaxing its investment guidelines to include illiquid assets. AP7 is receiving the assets from the funds culled from the premium pension system, unless savers make a choice from the other funds on the platform.
Mats Langensjö, a pension expert, was commissioned to create a new framework for AP7. The fund was established in 2000 and not much has changed since it was set up. It manages SEK460bn (€43bn) for more than two-thirds of premium pension savers. Langensjö is expected to submit his report by the summer followed by a consultation round as part of the second stage of the premium pension reform.
Reforming the country’s buffer funds seem to be permanently on the agenda. However, reforming the AP funds through consolidation was scrapped in 2015, which Bolund admitted at the time was a disappointment. Political consensus was not achieved in the six-party Pensionsgruppen, Pensions Group, the multi-party group formed to ensure stability in the system. Despite this and the latest Left Party suggestions for scrapping the Premium Pension system, Bolund does not see any cause for concern for the Pensions Group and general consensus.
Despite the lack of overall reform of the AP funds the government recently relaxed the investment guidelines governing the buffer funds and further changes are expected. Bolund says the changes are an effort to increase flexibility but abolishing quantitative restrictions and introducing a prudent person-type investment rule is not on the agenda as the broader reform was scrapped. “The AP funds have the freedom and opportunity to interpret the guidelines and implement their strategies. We have the political responsibility to ensure that the general public feel that the system is stable and safe,” he says.
New investment rules were introduced in January. One of the main changes allows up to 40% of assets to be invested in illiquid assets. Bolund says further changes are out on consultation and responses are expected in the summer, with new guidelines introduced in March 2020. “We want to increase cost efficiency and return potential and give the AP funds the same possibility that other similar institutional investors have when investing in long-term illiquid assets while also increasing sustainability,” he says.
One proposal is for AP funds 1-4 to be allowed to enter co-investment structures in unlisted private equity companies and to take on the operational management of these companies. Bolund says the proposal also seeks to enable the AP funds to retain more than 10% of the shares in a real estate or private equity company after it lists, if the AP funds are owners prior to the listing.
Another proposal, Bolund says, is for the AP funds to be allowed indirect investments in fixed income and credit through funds and to lend capital to real estate and unlisted private equity companies where they own shares.
Before becoming the minister for housing in January, Bolund was also the minister for consumer affairs. For him, improving consumer protection continues to be top priority, combined with sustainability for the many new reforms and regulations governing pensions and the fund industry that Bolund has initiated or been involved in.
As part of this objective, Bolund has taken the fund and insurance industry to task. He has introduced regulations to promote sustainable investments, clarify fees as well as active share proportions. Fund companies have to clearly state their sustainability capabilities and it should be easier to pick these funds, Bolund says.
He has also introduced legislation to make it more difficult to charge excessive fees and in particular charging active fees for passive products. Fund companies are obliged to declare the active share of their products to show investors what they are paying for.
The new framework
• New requirements for entry onto premium pension platform: minimum of three-year track record, three-year operational history, SEK500m (€46m) outside the premium pension system, minimum sustainability requirements.
• Stage two of reform: Fund department of the Swedish Pension Agency gets a procurement role to select funds onto platform.
• AP7 review: new framework and risk profile investigated: potentially invest in unlisted assets.
• New rules for AP funds: stricter sustainability requirements, funds can invest up to 40% in illiquid assets, minimum investments into high credit-rated fixed income reduced to 20%, no longer required to outsource a minimum of 10% to external providers.
• Further new rules expected: AP funds will be allowed co-investments in unlisted private equity companies and take on the operational management of these, keep more than 10% of the companies at listing if they were owners prior to the listing, indirect investments in credit and fixed income via funds, lend capital to real estate and unlisted private equity companies they own shares in.
• Green bond issue: Sweden planning green government bond issue in 2020.
Bolund is also keen to make the financial system more sustainable. “Sweden has been leading the way in many aspects and the next logical step is for the government to issue green bonds,” he says.
Mats Andersson, former CEO of the AP4, was hired to chair the inquiry into the market for green bonds and the government is keen to proceed, Bolund says, adding that the bond issue would likely happen in 2020. “Our aim is to make Sweden a a fossil-free welfare country and we signed the Climate Act to make the country emissions neutral – that is, zero per cent carbon emissions, by 2045. Issuing a green bond is another step in this direction,” he says, adding that the goal is to make all future bond issues green.
Looking at Bolund’s track record it is not surprising that he was crowned the most ‘environmentally powerful’ in the country. It is a crown he would be proud to relinquish to Greta Thunberg, the activist schoolgirl who is on a mission close to his heart – making the planet green again.