Proposed reform of Sweden’s SEK1.2trn (€126bn) buffer fund system increases the risk of political micromanagement and lower overall returns, and cannot form the basis of an overhaul of the funds, according to senior management at the four main AP funds.
The proposed changes – which would see private equity fund AP6 merged with AP2, control over investment in unlisted assets transferred to a single fund, and the closure of a second, unnamed AP fund – could also undermine the remaining three funds’ authority to invest as they see fit.
It was also alleged that the changes would see the funds shift towards a low-yield index-tracking investment strategy, in addition to the offloading of domestic Swedish holdings and a shift away from real estate and infrastructure due to the use of a reference portfolio to guide investment strategy.
In a combative opinion piece for Swedish daily Dagens Nyheter, the chairs and managing directors of AP1, AP2, AP3 and AP4 argued that the current regulatory framework had worked well, allowing funds to achieve high returns at low cost while investing in long-term assets and considering ethical matters.
The article branded the proposed governance structure “unclear and bureaucratic”, warning that oversight of the funds would shift from Sweden’s Parliament to the government.
“The proposals to establish a National Pension Fund Board and the ability for the government to have an influence will mean that power over the AP funds will shift from Parliament to the government and present the prospect of short-term political micromanagement,” they said.
“The fact the current government does not plan to make use of this ability has no bearing on what future governments may do.”
The funds also argued that savings of SEK50m identified in the cross-party reform proposal published by Pensionsgruppen would be overshadowed by the cost of reorganising the funds into three entities.
This cost, they said, will take “several generations” to recoup.
The potential two-year timeframe of the restructure also risks the funds “[losing] their focus on long-term asset management”, impacting returns.
They noted that, even if returns are 0.1% lower than without the overhaul, it would come at a cost of SEK1.2bn.
“Those of us who have been tasked with managing the AP funds’ capital responsibly for the benefit of current and future pensioners, with the pension system facing significant challenges over the next 15-20 years, believe the proposed new rules for the AP funds will not lead to better pensions – quite the contrary,” they said.
The article, signed by Johan Magnusson, Eva Halvarsson, Kerstin Hessius and Mats Andersson, managing directors of AP1-4, as well as the the funds’ respective chairs (Urban Karlström, Marie Arwidson, Pär Nuder and Monica Caneman), concluded: “This proposal therefore cannot form the basis for a reform of the AP funds.”
It is not the first time the AP funds have criticised the reform proposals.
Mats Langensjö, chairman of the 2012 Buffer Fund Inquiry, previously warned that the government’s reforms would see the funds deploy a passive, index-tracking portfolio over time.
The Confederation of Swedish Enterprise also warned that the reforms could be “seriously detrimental” to the stability of the system.
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