Sweden: More freedom to invest
Rules limiting investment by national pensions buffer funds have been relaxed
• The government has proposed changes to AP fund mandatess.
• New draft rules also aim to clarify regulations on the funds’ sustainability activity.
• The cross-party Pensions Group is to decide on changes to the Premium Pension System.
• The government is set to clarify occupational pension scheme capital requirements in autumn 2017.
Long-standing investment limits for Sweden’s national pensions buffer funds are set to be relaxed following a proposed package of changes to the mandates for AP funds one to four.
The changes – contained in the July 2017 memorandum from the finance ministry’s financial markets’ division entitled ‘Changed Rules for the First to Fourth AP Funds’ (Ändrade regler för Första–Fjärde AP-fonderna) – address concerns the pension funds have themselves expressed. These centre on the relatively high level of government bonds and similar instruments, coupled with the lack of opportunity to invest in alternatives such as infrastructure. They are seen to be hampering their ability to generate returns in the extreme-low-interest-rate environment.
Draft changes announced in July by the finance ministry include a new 40% ceiling on illiquid investments to replace the current 5% ceiling on unlisted instruments. The cap on illiquid investments is to include real estate, which is unlimited under the current rules.
The new rules will only require the four AP funds to hold 20% of assets in interest-bearing securities with low credit and liquidity risk – down from the current floor of 30%. In addition, the proposal removes the rule that 10% of their assets must be managed externally, as well as the funds’ ability to invest in commodity derivatives.
The planned changes reflect some of the many ideas contained in the buffer fund reform which was shelved at the end of 2015 in the face of political disagreement. The draft rules in the memorandum also aim to strengthen and clarify the regulations around the funds’ sustainability activity.
The proposal states that the funds must work together on responsible investment and develop guidelines jointly, and that they must work to become exemplary in the field of sustainable investment.
It came from the cross-party Pensions Group and the deadline for consultation responses is 26 October. The new rules are scheduled to take effect in July 2018.
As part of Sweden’s drive to reform its public pension system, which has been under way for several years, various measures are on the discussion table for Pensions Group.
In September 2016, the Premium Pensions Committee, led by the former director in the Swedish finance ministry Patric Thomsson, put forward proposals to improve the Premium Pension System (PPM), including the idea that individuals be required to re-evaluate their fund choice every seven years.
The committee, which was tasked two years before to look into ways the system could give savers better results, estimated that this measure could result in between SEK100bn (€10bn) and SEK380bn being transferred to AP7.
Under the proposals, new contributions would be directed straight to AP7’s Såfa balanced default option and savers then informed that the funds could be invested either by AP7 or through funds in the PPM fund marketplace.
People with funds already invested would face regular evaluation choices every seven years. Those who did not register any choice would have their entire premium pension capital transferred to the default option, following a reminder.
In June, the government moved to accelerate the process of reforming its Premium Pension System (PPM), by appointing Cardano director Stefan Lundbergh to devise a ‘map’ of the possible solutions for the PPM’s structure to guide the Pensions Group in its deliberations.
The government is aiming to have the PPM reform completed before the September 2018 election process begins.
The reform is aimed in part at solving the problem of abuse of the system by rogue pensions investment providers, examples of which have scandalised pension savers, particularly over the past year.
The PPM is a funded part of the Swedish state pension and allows Swedes to choose how some of their pension contributions are invested.
People can opt to have their contributions managed by some of the hundreds of private sector investment managers that belong to the PPM fund marketplace, or they can pick the Såfa balanced default fund option run by state pension fund AP7.
Also in June, the Premium Pensions Authority (Pensionsmyndigheten) – in consultation with the Swedish Financial Supervisory Authority (Finansinspektionen) and other bodies – published a document with proposals for strengthening consumer protection in the PPM in response to concern about abuse from some providers operating within the system.
Proposals include imposing higher regulatory entry thresholds for premium pension providers, which the agency said would make it more difficult for unscrupulous players to join the marketplace.
The agency also suggests its mandate be broadened so that it makes qualitative overall assessments of funds and fund companies in the marketplace.
It also proposes that telephone sales be banned within the PPM.