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Impact Investing

IPE special report May 2018

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Seeking alpha overseas

Three years of falling equity markets have prompted Swedish pension funds to head back to the asset liability drawing board. In the past year, some of the country’s largest schemes, such as the AP3 Swedish buffer fund, underwent exhaustive ALM studies to determine which long-term portfolio mixes would generate the greatest benefit for the fund.
The action came against a background of single-digit returns in recent years. The result has been renewed interest in active management after a number of institutions had moved heavily into passive strategies during the bull market.
The shift to diversification and active strategies has been seen most publicly in the AP funds, a number of which have recently appointed managers, or are set to hire, for specialist asset management briefs such as US small caps (AP1 and AP3) or Pacific equities (AP1).
The PPM default fund AP7 says it is also considering introducing a huge currency overlay strategy in a sign that Swedish funds are increasingly seeking their alpha overseas.
At the same time, defined contribution pension plans have almost made a clean sweep of the country’s collectively agreed nationwide pension schemes. One after another, these schemes have become contribution-based. The ITP scheme for 600,000 salaried white-collar employees in the private sector, remains one of the only plans unchanged in its main DB format, although this has been under serious discussion this year.
For Swedish occupational pension plans it remains to be seen how the pan-European Pensions Directive will impact upon them. As Jan Waage of consultant Wassum in Stockholm, comments: “We have discussed it to quite some extent, but there is still a lot of discussion to be had and in all honesty I’m not so sure exactly what kind of an impact the directive will have.
“I think there may be some governance questions and there may be some pension education issues rather than any asset allocation changes, but it is difficult to say.”
Waage says he is seeing interest in the potential for pan-European pension plans from Swedish multinationals, though. “Obviously it is something of tremendous interest if and when it is possible to realise the full potential of this. The question then is how far away is it until it becomes a realistic proposition and I think there are tax issues still to be looked at here.
“There are number of areas where things might be gained but it’s a question of how much it will cost to realise those potential gains and that has still to be weighed up.”

The European Court of Justice decision rejecting Sweden’s treatment of pension taxation in the so-called Skandia case, is, albeit inadvertently, being seen as a move that could help to open Europe’s pension market.
Swedish life insurer Skandia took on the Swedish government over the right for employers to claim tax deductions for premiums toward occupational pension plans sold by life assurance companies domiciled in another EU country.
The European Court of Justice rejected the arguments put forward by the Swedish government to justify the tax rules. The ruling means that life insurance players should be able to operate without tax hindrances across the EU, a potentially important step towards an open European market for occupational pensions.

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