Sweden: Green giant
Aside from concerns about the performance and costs of the AP buffer funds, the government has also outlined an ESG agenda for institutional investors, writes Robert Melia Watson
Sweden's financial supervisory authority, Finansinspektionen (FI), continues to hold faith with the traffic light solvency system for life insurance companies, life and pension companies and pension funds.
Buffers reduced in the final quarter of 2008, the FI noted in February, and three occupational funds, accounting for only 2% of total pension assets, reported a red light.
Implemented in 2006, the traffic light system measures how companies' capital buffers would be affected by prescribed changes to domestic and foreign interest rates and equity market changes, real estate prices changes, credit risk and exchange rates.
Among Sweden's largest institutional investors remain the autonomous AP buffer funds, which the Swedish government evaluates annually.
The government has launched a review of the AP funds' cost management in the light of last year's poor investment performance, which suggests the merger of some operations has not been ruled out.
AP1 posted a return of -21.9% for 2008; AP2's result was -24%; AP3 posted -19.8%; AP4 reported -21% and AP6, which invests in domestic private equity, recorded -16.6%.
In a letter presented to parliament in May by the finance ministry, Mats Odell, minister for local government and financial markets, has challenged whether active management delivers value over the long term and suggested the AP funds should "explore the possibility of co-ordinating common functions".
He recognised some of the losses could be explained by turbulent market activity in the light of the credit crunch but said the results of active fund management were "generally weak" and argued the funds' practices could be improved to gain efficiencies and more secure returns.
"Although most of the decline in 2008 can be explained by the financial crisis, the AP funds' asset management is not satisfactory," said Odell. "It is high time that the AP funds review their cost base in order to safeguard the buffer capital and avoid further deterioration for pensioners."
Another key area the Swedish government is looking at closely is the environmental, social and goverance investing record of the national funds. In a report published earlier this year, entitled Ethics, Environment & Pensions, the Swedish government made its intentions clear: "In future, the funds should work more proactively and seek to integrate sustainability aspects into the investment management process. To consolidate and strengthen public trust, the funds' governing boards should adopt, follow up and communicate a set of basic values or principles for how the funds should operate."
In practical terms, the Swedish authorities want the AP funds to continue adopting policies that underpin and influence the pension system overall. This entails formulating clearly and coherently the key values that drive their investments. These must be readily available and understandable to all Swedes as the beneficial owners of the AP funds.
The report goes on to say that the values must have broad public support: "A natural starting point for the development of such values is Swedish Constitution's Instrument of Government which aims to promote the freedom and wellbeing of citizens and ensures a good environment for present and future generations. The international conventions that Sweden has signed represent a practical expression of these basic values and work on developing a set of fundamental principles. The funds should actively communicate their basic values to the public and describe how these govern their investment activities."
One of the key areas in which the Swedish government is keen to see change is how pension funds view SRI and ESG principles. It wants the AP funds to integrate them fully into their operations.
"We take the view that ESG aspects represent both risks and opportunities that can be confronted and exploited respectively by integrating them into ongoing analytical and management processes as far as possible, instead of treating them as a separate issue," the report states.
"The next step is to develop strategies for future investments taking into account ESG aspects. One such course might be to develop a strategy for the fund portfolio's total carbon emission count," it suggests.
Sweden acknowledges that this is not going to happen overnight and that careful planning will be needed. Although it expects regular updates, it is also keen to emphasise the autonomy of each AP fund.