Stockholm (NordSIP) – The buffer funds for Sweden’s state pension system are to have restrictions on investments and internal management relaxed by the Swedish government. The four largest Swedish AP funds (1-4), worth a total of €135bn in assets, are set to have extant investment restrictions relaxed following a long campaign to obtain greater leeway in making self-determining investments, something the funds have claimed would lead to greater returns following difficulties in the current low-yield environment. The proposed changes are also set to affect the funds’ sustainable investments by bolstering and clarifying the regulations surrounding these.
The Swedish finance ministry published draft legislation of changes to the existing AP funds’ mandate in July that includes a new 40 per cent ceiling on illiquid investments, replacing the current 5 per cent cap. Other changes include a reduction in the minimum allocation to interest-bearing securities with low credit and liquidity risk from 30 to 20 per cent. The reaction comes after repeated warnings from fund managers that past levels of return would not be sustainable with government bonds persisting at low or negative levels, with numerous pension funds in the Nordics realigning towards unlisted investment such as infrastructure, equity and private debt. The move follows previous attempts to reform the investment regulation for Sweden’s AP funds, including a failed attempt to merge two of the funds.
Pending the signing of the draft legislation into law, the AP funds will also be released from the obligation to have at least 10 per cent of their assets managed externally. AP fund managers have responded positively to the draft, while suggesting they may apply pressure for the government to further relax its grip. “A more modern and flexible framework can provide us with better prerequisites for achieving our return targets in the long term and thus fulfil our role in the pension system,” Gothenburg-based AP2 coordinator of corporate governance Ulrika Danielson told Investment & Pensions Europe Rachel Fixsen, adding: “It’s positive that sustainability is enshrined in the law, as we are already actively working with sustainability.”
“The proposal in its present form, however, imposes restrictions on the AP funds’ ability to choose the form of investment for illiquid assets” however, she warned. “To continue to be cost effective in asset management it is important that the AP funds are also allowed to have flexibility in the choice of form of investment in illiquid investments.”
The draft legislation is now in consultation phase, with the deadline for responses from the AP funds due October 26. The new regulation is scheduled to take effect July 1st, 2018.
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