Sweden is to close two of its AP funds and overhaul the remaining buffer funds’ investment strategy and governance structures, the minister for Social Security has said.
Accepting many of the recommendations put forward by 2012’s inquiry into the buffer fund system chaired by Mats Langensjö, the cross-party Pension Group said the current model – whereby the AP funds are both asset owners and managers – would end.
The review was initiated by the Swedish government in 2011 to assess AP1 through AP4, as well as the private equity investor AP6.
A spokesman for Ulf Kristersson, Sweden’s minister for Social Security, confirmed the government’s intention to close two of the five funds covered by the inquiry.
The spokesman said a further review would help decide which two would be wound up, with assets transferred to the remaining three.
But he declined to specify when any decision would be reached.
In a detailed statement by the Pension Group – comprising the four governing parties and the main opposition social democratic party – it was also confirmed that responsibility for the AP Funds would be transferred to a single principal.
The principal would be autonomous from the Swedish Pensions Agency, or Pensionsmyndigheten, but closely linked to the body, potentially sitting on the agency’s board.
The statement further said the goal of the changes was to “improve the prospects of cost-effective management” of the buffer funds.
In addition to transferring ownership of the funds’ assets to the appointed principal, the Pension Group also accepted a recommendation for the introduction of a reference portfolio to be used as a benchmark for performance.
The benchmark would allow for the removal of the current quantitative investment rules, to be replaced with a “general duty of care principle”.
However, despite suggestions that investment rules should be based around a prudent person principle, the report said certain investment restrictions – specifically governing the funds’ ownership of Swedish listed companies, capping total ownership at 2% of market cap and 10% of voting rights – should be maintained.
The principal would further “formulate a target for buffer capital management in terms of long-term returns, risk tolerance and time horizon”, the Group added.
It also suggested the remaining funds should more closely coordinate their investment in unlisted assets “either through collaboration or by the activity [being] concentrated in a fund”.
“One possible alternative is to concentrate the management of unlisted assets to one of the three buffer funds,” the report continues, noting that “at least” two of the other funds would be required to invest along similar lines, benchmarked against the same reference portfolio.
In response to the proposals, Kerstin Hessius, chief executive of AP3, pointed to the fund’s current low annual management costs of 0.13% and noted that it had met and surpassed its real return target of 4% over three, five and 10 years.
Both AP2 and AP3 also referred to their previous official responses to the enquiry, in which they accepted the need to tweak the system but described the potential for a consolidated three-fund model as “cumbersome”.
The cross-party report also said it would be “natural” to assume that one of the funds would remain based in Gotheburg, Sweden’s second city and currently home to both AP2 and AP6.