In a well wooded suburb of Stockholm, the Swedish national telecomsgroup Telia is constructing its pension fund. This is a process that started last year and is continuing with hefty tranches of funding to build up a fund with Skr10bn ($1.3bn) of assets.
Telia Pension Fund president Leif Hållstedt says: In the first and second quarter of 1996, Telia put in Skr2bn and we received another Skr2bn in the third and fourth quarter." The Telia annual report for 1996 shows the fund size at Skr4.476bn at the year-end, which includes the investment returns obtained in the year. Hållstedt says the contributions have continued this year and he expects by the end of 1997 Telia will have provided the fund with most of the funding planned for.
The fund was formed to take over all the pension obligations that Telia took on when it became a limited company in mid-1993, replacing the former public utility Televerket. These amounted to over Skr10bn. So all employees who had retired from Televerket before July 1993 and those of its employees who continued with Telia have their pensions for service up to the July date secured by the fund. For service from that date, their pensions are covered by Telia's book reserve system. The decision to fund was taken after careful consideration of the alternatives, says Hållstedt. One major reason for making the move was that good fund management could result in lower pension costs to the company. It also gives the company more control and flexibility over its pension provisioning, he says. Another consideration favouring funding was the fact that balance sheet analysis is easier, particularly for those not conversant with the book reserve system. With Volvo already down this road and the post office on the way, Hållstedt expects more Swedish firms to make the same decision.
The fund is currently 40% in fixed interest, which except for 2-3% is all in Swedish bonds, reflecting the fact that nearly two thirds of Telia's Skr15bn of liabilities are to employees who have retired already. The balance is split 30% in domestic equities and 30% in foreign equities. "As the fund has only a small administration, just two of us, we manage all our assets externally. We have seven different portfolio managers - two in foreign equities, three in domestic equities and two in fixed interest," says Hållstedt. "But we have not told anyone who the portfolio managers are. The only information we give is that one of the managers on the fixed interest side is the Telia treasury department. From our point of view, they are also an external manager as we have a contract with them as with other managers." He believes that it keeps managers on their toes if they do not know whom they are competing against.
The benchmark for Swedish fixed interest is OMRX40 %Tbond/60%Tbill, which gives a duration of about two years, says Hållstedt. The foreign fixed interest index used is Salomon Brothers G5 unhedged. On the equities side, for domestic, the Total Return Index is used because net dividends are reinvested. For global equities, it is Morgan Stanley World Index net dividend reinvested. The portfolios are all active and the managers are expected to outperform. The fund, points out Hållstedt, has the financial objective of obtaining a real return per annum of a minimum of 4% over a five-year period. The returns in the first year of Skr476m on funds amounting to Skr4bn invested over the course of the year are exceptionally good, he acknowledges. Hållstedt has developed a system for continuously monitoring the portfolio. "We follow up managers every month to see how they are all doing against the index. We use our own computers, where we enter in the market values of the holdings and so on, so that we can collate these against the benchmark and see how we are doing." The same exercise is done to check risk and return and the information ratios for each portfolio managers are examined.
"Now we have built up a good series of information ratios about managers' performance. We think it is important to build up this information ourselves and not rely only on the managers' figures." Since Telia is a large fund by Swedish standards, he says: "We have chosen managers who are of sufficient size to take care of us." One concern is that if an individual portfolio manager left, there would always be others available to carry on.The original contracts are in place for two years, and come up for review after the first quarter of 1998. "By then we will know which managers are doing a good or bad job for us and whether we need to change anything," says Hållstedt. Fennell Betson"