Sweden AP funds prepare for future

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Sweden is far from resting on its pension reform laurels, the social security minister tells Pirkko Juntunen

Sweden's pension reform in the late 1990s was viewed as a model for success. A decade later, and a new centre-right government in power since 2006, reforming system continues to be on the agenda, as is the scrutiny of the country's buffer funds, the AP funds.

In April 2008 the so called Pensionsgruppen, a working group where all the five Swedish political parties in government are represented, was created to continuously monitor and come up with reforms.

Cristina Husmark Pehrsson, the minister for social security in Sweden, and who heads the group, tells IPE that while Swedish pension system is financially stable and built to withstand turbulence, the world is continuously changing and there are always maintenance issues in any system. This is why Pensionsgruppen, the Pensions Group, was launched, making it a practical solution ensuring the stability of the system. "The pension reform and system rests on an agreement between the five parties, above the left-right dividing line, and has an 85% support in parliament. The agreement stands as long as all support its existence. Should something change, the agreement falters, which only those outside the agreement would wish for," Husmark Pehrsson says.

As elsewhere, the financial crisis is high on the agenda for the pensions group. "We are looking at short and long-term effects of the crisis and some of the issues we are battling with are employment levels, which affect the inflows to the system and the effects of people living longer, making it necessary to stay in employment for longer," she says, declining to elaborate on details.

One of the topics constantly on the agenda in Sweden is the AP funds. During 2008 losses of more than SEK40bn (€3.8bn) led to critical headlines and many questioned the sustainability of the system. As a result of the turbulence the pensions group suggested a change in how the value of the funds is calculated. "We want to calculate the value of the funds over a period of three years instead of annually, at the end of December. This way, sudden stockmarket drops will not have unreasonable effects in one single year. These are instead spread out," Husmark Pehrsson explains.

The AP funds' management teams see the move as sensible and are investigating its effects. But some argue that this will increase the risk appetite of the funds because events such as 2008 would be spread over three years.

Agreeing with the management teams of the buffer funds, Husmark Pehrsson says it is important to remember that the buffer funds only constitute 10% of total pension assets. "The greatest focus has to be on securing pensions through employment. In the end it is only employment that can secure all pension systems, irrespective of their construction."
The pensions group is currently looking at the organisational structure and investment regulations governing the AP funds. "We are too early in the process to say what the outcome will be or what changes will be implemented," Husmark Pehrsson says.

Earlier in the year, the Swedish minister for local government and financial markets Mats Odell questioned whether or not active management of the AP funds delivers long-term returns and also suggested that the funds should investigate ways to co-operate in order to cut costs.

The management teams of AP1, 2, 3 and 4 are working closely to find synergies but still remain independent. They also question the focus on costs and believe that the debate is often skewed towards looking at numbers instead of evaluating what added value potential extra costs can give. The management teams are wary of being forced to take the passive route just for the sake of it, while agreeing that active management has to be what it says on the tin for it to be worth the extra cost.

Another key area the Swedish government looked at was the environmental, social and governance policies of the funds. The AP funds have always been pioneers in promoting good governance and corporate engagement. The funds have a joint Ethical Council, which is continuously looking at best practice and issues of governance. The management teams are currently looking at how to develop a strategy for the fund portfolios' total carbon emission count.

Apart from dealing with the effects of the crisis and other issues surrounding the AP funds, the pensions group also recently worked with the ministry of finance to reform AP7 to create a more flexible solution than the current one.

The total overhaul of AP7, which manages the Premium Choice and Default funds, both of which will be scrapped and transformed into a single new type of fund, is part of a range of proposals to improve the system.

One of the changes proposed is that the default fund, which Swedes could not actively select as an option or choose to opt into again if you left it, will be given the characteristics of a ‘generation' fund and be fully selectable as an investment option.

Investors in the new ‘generation' fund will also be able to choose their risk profile. Those who do not make an active selection will have their assets placed in a fund where the risk profile corresponds to their age as well as the total risk of the person's entire old-age pension. However, the funds will not be traditional generation funds. Instead, investors will be invested 100% in equities until the age of 55, after which the proportion of bonds will be increased gradually. The proposal will also make it possible for those who made active choices earlier to go back into the government option.

All existing savings from the default fund will be moved to the new alternative during May 2010. Investors will be told of the new options or they can make a choice of any of the other funds in the system. The assets from the Premium Choice fund will be divided between all the funds in the system, just like when any other fund in the system is liquidated.

In addition, those investors who would like a different risk profile than the pre-decided age-related option will be offered ready-made portfolios with different risk profiles, managed by AP7. These profiles will be low, medium and high risk, depending on the individuals' age and total risk profile of their total pension assets. AP7 will be able to offer one of the most cost-efficient products within the system, with a fee of 0.15%.

Odell, says that the premium pension is an important part of the pension system but many are not making active choices. He believes that the changes will be better suited to investors' level of knowledge and engagement, and will be fairer at the same time.
The proposals also suggest that the new entity replacing Premiepensionsmyndigheten (PPM), Pensionmyndigheten, the Pensions Authority, in 2010 should be able to charge investors for changing funds, in order to better divide the costs between those who are actively making choices and changes, and those who do not. Odell says that today these costs are equally divided between those who make choices often and those who do not, which is unfair to those have to pay for others' choices.

The creation of the new authority will see parts of the social insurance administation merged with PPM. Husmark Pehrsson says PPM was created to handle the funds entered into the then new system. "The social insurance administration had, at the time, a giant task in re-organising the existing system and it was therefore deemed rational that the administrator continued with its part of the pensions. A new combined entity was not discussed at the time and it is my firm belief that it would probably not have been possible without great delays."

Over the years, it has become clear that information is a central issue. "Without knowledge about how the system works you cannot fully take advantage of the benefits and it has proven difficult to distribute information but foremost to increase knowledge," she adds.

One part of the problem is that most Swedes receive pensions from various sources, which complicates the issue further. "A key component for the new pensions authority is to arrange for information to be co-ordinated, which is easier with one entity. In the long term this should also be cheaper," Husmark Pehrsson says.

She agrees that initial costs to merge two entities will be high. "All administration will be paid by the pensioners and pension savers so costs will increase in the short term. This increase will, however, be paid back through the savings that a single entity will garner. Over the long term costs will be reduced and information will be increased," she notes.

Katrin Westling Palm, will be heading the new authority and is currently working to get it up and running. She was previously head of the Swedish tax authority, Skatteverket.

The minister said that despite the fact that all five parties are represented in the group, negotiations have not been unduly onerous. She argues that Pensionsgruppen facilitates co-operation and reduces the risk of the pensions agreement failing and is a permanent entity for as long as the pensions agreement stands.

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