Sweden: New government, new reforms
Plans to split the regulation of insurance and pension companies have met with controversy, while reform to the AP fund system is to move ahead following years of deliberation
Regulation in summary
• There are plans to split insurance companies into life insurers and pension entities using frameworks based on Solvency II and the Institutions for Occupational Retirement Provision Directive.
• A 2017 deadline looms for former occupational pension funds, currently still constituted as friendly societies, to restructure as occupational pension associations.
• Reform of AP fund system will merge AP6 and AP2 and close one of the funds based in Stockholm.
• A review of the premium pension system, led by Patric Thomsson, former director in the Swedish finance ministry, will report in late 2016.
The overhaul of pension and insurance regulation, coupled with substantial changes to the AP fund system, means institutional investors are facing significant regulatory changes.
The suggestion that insurance and pension companies should be split, allowing insurers to be regulated under Solvency II regulation and pensions under the Institutions for Occupational Retirement Provision (IORP) Directive, has been controversial.
The Finanacial regulator Finansinspektionen (FI) argues that it is important to maintain the existing principle of ‘same risk, same rules’, regulating most large pension providers that offer ITP plans (the second-pillar schemes for white-collar workers) as insurance entities. The new approach is in contrast to Denmark, where all pension providers are treated as insurers and subject to solvency requirements.
Standalone mainly corporate pension funds, that until recently were allowed to function as friendly societies – a model abolished in 2011 – are also faced with a 2017 deadline to become either a life insurance entity or an occupational pension association.
After years of deliberation, agreement on reforming the AP fund system was finally achieved in June 2015 by the governing Social Democrats and the Green Party, as well as the four right-leaning opposition parties represented in Pensionsgruppen – the cross-party consultative body for pension issues.
The current AP fund system indludes the four main funds (AP1-4) as well as AP6, which manages private equity assets. AP7 is the default investment option for workers in the premium pension system. The current AP fund set-up was put in place at the turn of this century.
The reform announced in June offers few surprises, at least at first glance. It stands by plans outlined by the previous right-leaning government of Fredrik Reinfeldt to reduce the number of funds from five to three, confirming that AP6 will merge with Gothenburg-based AP2. One of the three funds based in Stockholm will also be closed.
Proposals put forward by the Buffer Fund Inquiry of 2012, chaired by Mats Langensjö, were also adopted, including one to appoint a principal in charge of the assets managed by the three remaining buffer funds. The new National Pension Fund Board will also determine the level of investment risk taken by the buffer funds, setting out details of a reference portfolio to be used as a benchmark.
Concerns have been expressed that the reference portfolio – not an idea endorsed by the inquiry – could lead to investment herding among the funds. While the four main funds are presently only restricted by the existing quantitative investment rules on how they can invest – including rules on how much must be invested in fixed income – the new reference portfolio could risk imposing a quasi index-tracking framework on the system.
Additionally, the incumbent government could reject the level of risk proposed in the reference portfolio, increasing the amount of political interference that is possible. Fear of political interference was one of the reasons the assets were spread among several funds when the AP system was established in middle of the last century.
The reforms have yet to be finalised, and support has waned, even though the six governing and opposition parties supporting the measures are more than able to pass them. In July, The Liberal People’s Party distanced itself from elements of the reform that risk giving governments the power to influence investment strategy through the reference portfolio. And the AP funds themselves have signalled a willingness to fight for their survival.
Mats Andersson, managing director of AP4, has warned that the reform proposals disregard the system’s achievements and that they risk destroying what was an effective arrangement that had proven its worth.
Per Bolund, the country’s deputy finance minister, has dismissed concerns that the reference portfolio will lead to passive investing, noting that it would still allow the funds to evaluate alternative ways of investing, as long as they act prudently.
The premium pension system also faces an overhaul. Patric Thomsson has been appointed to lead an investigation into the premium pension system, first announced by the previous government in the summer of 2014.
While the final report was meant to be published this September, Thomsson’s delayed appointment and the decision of Stefan Löfven’s left-wing government to amend the terms of reference mean that the final report will be presented in late 2016.