A proposal has been made to consolidate the three Stockholm-based Swedish pension buffer funds into two funds.

The long-awaited Review of the buffer funds was presented by the Swedish Ministry of Finance’s departmental adviser, Tord Gransbo, earlier this week after the deadline was extended from March this year. He was tasked with investigating and proposing measures to modernise and streamline the overall management of the buffer capital.

In his review, Gransbo considered four proposals on the possible consolidation of the buffer funds. Regarding the Stockholm-based buffer funds (AP1, AP3 and AP4), Gransbo was in favour of winding up one of the funds, leaving just two, stating that the “advantages outweigh the disadvantages”. However, he did not state which funds should be wound up, instead saying it would be for the government to decide.

The other proposal for the funds, which he vetoed, was to exploit economies of scale as far as possible by co-locating the Stockholm funds and increasing cooperation on administrative and management functions. Although he said this would increase cost efficiency at a lower risk level than consolidation, Gransbo believes economies of scale in asset management would not be exploited.

“The three Stockholm-based funds share many similarities. They have moved towards a more similar asset allocation of assets under management – which is of the same order of magnitude – and have increased their co-owned investments. They employ similar numbers of staff in the same job categories and compete for sought-after staff with the same industry players,” he wrote.

“They have deepened their cooperation through their joint collaboration council, in which the other AP funds also participate. They also co-operate within the AP Funds' Ethical Council, which has recently been reformed. The high degree of similarity means that there are good opportunities to achieve economies of scale in asset management through consolidation or mandatory administrative cooperation,” he continued.

“Both this consolidation proposal and the alternative proposal… could lead to greater cost efficiency in the long term. However, the consolidation proposal has a much greater potential to improve the conditions for efficient, rational and effective management of the buffer capital and thereby contribute to a higher net return in the long term. This proposal is therefore preferable.”

In response, AP4 head of communications, Karoline Hammar, said the pension fund will analyse the proposal and assist in the formal consultation process that will commence shortly.

“It is good and natural to regularly review the management of the public pension system's buffer capital, and we welcome the fact that ‘Pensionsgruppen’ has started to review how the pension system can be developed and strengthened - including the report "Review of the buffer funds" presented the 17 June,” she said.

Furthermore, whilst one of Gransbo’s proposals involved winding up AP6 and transferring its operations and capital to AP2, his preference is for maintaining AP6’s current organisational structure but integrating it into the wider buffer fund system. Currently, AP6 is an outlier to the system, specialising in unlisted investments.

“The Sixth AP Fund has not been integrated into the buffer fund system. It is high time that this happened,” he said in his review.

“Both this proposal and the proposal above… are possible to implement and are expected to provide the conditions for appropriate and cost-effective management of the buffer capital, in order to achieve a higher net return in the long term. However, the proposal described here, which does not change the organisational structure, is preferable. The proposal has great potential; it contributes to a desirable risk diversification in the system, as unlisted shares are an asset class with high potential returns, and can be quickly realised,” he wrote.

In response to the report, AP6 CEO, Katarina Staaf, told European Pensions that the proposals are about "better utilization of the Sixth Swedish National Pension Fund's specialist expertise in high-return unlisted shares". As far as AP6 is concerned, it is welcomed that the review chooses to highlight AP6’s niche expertise that has created high returns for the Swedish pension system.

“The review points out that the expertise of AP6 should be scaled up and that AP6 should be fully integrated into the Swedish buffer system. One way of doing this, according to the review, is to remove today’s legal requirement of currency hedges, to allow inflows and outflows linked to the pension system and to open for AP6 to be enabled to borrow from The Swedish National Debt Office (Riksgälden), who is the central government financial manager. All are necessary changes that we welcome,” Staaf said.

AP1, AP2 and AP3 have also been contacted by European Pensions for a response but they have yet to respond.

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