SWEDEN - In its annual evaluation of the AP funds the Swedish government has expressed dissatisfaction with their long-term performance, despite 2009 providing the best returns since inception 2001.
The government said in a statement that while the results since inception were explicable they were unsatisfactory. The explanation for the poor numbers was the historically weak equity markets during the period of 2001-2009.
However, the buffer funds or AP1-4 and AP6, with combined assets of SEK827.1bn (€85.6bn) at the end of 2009, held up well in comparison with other funds around the world such as Norway's Government Pension Fund Global, France's FRR or similar Canadian funds or Calpers in the US.
Mats Odell, the minister for local government and financial markets, said it is positive that the AP funds improved their returns during 2009 compared to the previous year. He, however, pointed out the importance of the funds continuously conducting a cost efficient management of the assets and focusing on decisions that will have the most positive long-term results.
In particular the government is critical of the performance at AP7, the fund which is part of the premium pension system rather than a buffer fund like the other five. Until earlier this month AP7 managed the Premium Savings Fund and Premium Choice Fund, neither of which achieved its return goals of beating the PPM Index, or the average returns of all the funds within the system during the five-year period between 2005 and 2009.
Since inception, however the Savings fund was level with the PPM Index. The risk level of the fund was also lower during three of the five years. The inadequate performance is a result of weak equity markets and the high allocation to equities these funds have had.
From May AP7 will no longer manage two separate funds, instead there will be an investment choice with a generation of life-cycle alternative with different risk profiles. (See earlier IPE articles: Swedish pension system shows deficit despite good AP results and AP7 to launch new products following overhaul)
McKinsey, which together with KPMG conducted the evaluation on behalf of the Swedish government, said in its report that the question is what demands AP7 will face in order to make it a success and what demands there will be on evaluation and governance of the fund. McKinsey suggested new relevant goals and benchmarks in order to evaluate the management of the new structure.
During 2009 many of the AP funds underwent changes to their investment models and now focus more on strategic decision-making. These changes have led to increased differentiation between AP1 - AP4, which will reduce risks within the system, according to the government statement. In addition, the four funds are now cooperating in order to reduce the administration costs, a move that the government recommended last year. The government would like to see an evaluation of the results of the cooperation as soon as possible.
AP6, which manages unlisted equities only, has during the year streamlined its operations and re-evaluated its involvement in early-stage investments, which the government believes will be beneficial to the system as a whole (See earlier IPE article: Early stage investments drag down long-term AP6 returns)
Odell noted that other areas which need further development and improvement include the environment and ethics as well as remuneration in companies where the funds are owners.
The government was also critical of certain aspects of remuneration within AP1-AP4 where it believes they have not followed the guidelines, which is the responsibility of the boards. In April 2009, new guidelines were introduced, limiting the use of bonuses.
The Swedish government has now handed its evaluation to parliament.