Regulating how Sweden’s buffer funds tackle matters of sustainability could undermine their ability to adapt to market changes, AP3 has warned.

Commenting on the government’s proposed overhaul of the system, managing director Kerstin Hessius said the reform package as a whole put the diversified nature of the four main funds’ investments at risk.

A compromise agreed by Sweden’s government and the four main opposition parties would see AP6 merged with AP2 and the closure of a second, as yet undecided buffer fund.

Additionally, the reform would establish a National Pension Fund Board charged with overseeing the system’s assets and agreeing levels of investment risk, which could be vetoed by the government.

Hessius said politicians were so far willing to defend only the proposals on sustainability, but she questioned the need to impose restrictive regulation on the funds.

She argued that regulation would give AP3 less flexibility as sustainable investment evolved, and that the fund had begun to decarbonise its portfolio, sell off coal holdings and establish a dedicated sustainability portfolio worth SEK10bn (€1bn) – without government direction.

The other buffer funds have also launched a number of other sustainability initiatives, and AP4 is a founding member of the Portfolio Decarbonization Coalition and recently tendered an equity mandate investing in companies tackling water scarcity

The managing director’s comments came as AP3 announced that it returned 6.4% over the first six months of the year.

It estimated it would have returned 3.9% had it been required to invest passively, something critics have feared would result from the government reforms.

“A passive index strategy [would have] amounted to SEK7bn less for the first half of the year alone,” Hessius said.

“Were we to measure for a longer period, the difference is SEK18.5bn.”

Hessius is not alone in her concerns for the reform of the AP fund system.

Mats Langensjö, chairman of the 2012 Buffer Fund Inquiry, has previously warned that the government’s reforms would see the funds deploy a passive, index-tracking portfolio over time.

Mats Andersson, managing director at AP4, has said the reforms could “destroy” the system, while AP2 managing director Eva Halvarsson has said the changes were “costly and risky”.