Stockholm (NordSIP) – On 23 October, the Swedish government announced the launch of a new investigation into the governing activities of the National Pension Funds (the AP Funds). The inquiry is to be conducted internally within the Ministry of Finance. It has already been approved by the Pensions Group, comprising representatives from all parties in the Parliament.
“Several previous inquiries have reviewed the funds’ mission, investment rules, structure and governance,” comments Niklas Wykman, Minister for Financial Markets, in an opinion article in Swedish daily Dagens Nyheter (in Swedish). “But there is still a need for reform.”
The complex reality of unlisted assets
According to Wykman, one of the key reasons for launching the new inquiry is the growing importance of unlisted assets in the buffer funds’ portfolios. The share of the AP Funds’ investments in real estate, venture capital and infrastructure has doubled in just ten years.
“There are good reasons to invest in unlisted assets, but such investments require high levels of governance and transparency,” notes the minister. “Market values are set more infrequently and contain a greater element of individual judgement. Remuneration to external managers is often higher but is less transparently reported.”
Wykman argues that to be able to make informed decisions concerning these increasingly more complex investments, it might be necessary to review the statutory competence requirements for the Directors serving on the boards of the AP Funds.
It is hardly surprising that this indirect criticism of the current board members has already created some debate in Swedish media.
The future of AP6
A related topic and another point of contention is whether there is still a need for a Sixth AP Fund, which invests exclusively in private equity funds and is regulated by a separate law. “The current structure reflects historical conditions,” comments Wykman. “The Sixth AP Fund […] was not included in the reform of the current regulatory framework that came into force in 2000 and 2001, but the previous rules were transferred in principle unchanged to the current law. Therefore, the Sixth AP Fund is now closed, meaning no money moves between the fund and the pension system. It has simply not been clarified how the Fund’s assets will be utilised to finance pensions,” he points out.
Given that all the other buffer funds can also invest in unlisted markets now, the question arises whether a separate fund dedicated to private equity is indeed necessary. “The specialist expertise that currently exists within the Sixth AP Fund could also be useful within the framework of a larger buffer fund. If the individual investments are larger, the fees can also be lower,” argues Wykman.
Fewer buffer funds make economic sense, according to the minister, who says that, even if each fund is cost-effective, the AP funds together still cost the taxpayers a whopping amount of around SEK 2 billion a year to operate. The investigation should, therefore, examine whether it would be feasible to combine AP2 and AP6, he suggests.
The man in charge
Counsellor Tord Gransbo, head of a unit at the department for insurance, pensions, and governance in the Ministry of Finance, has been tasked with reviewing the administrative provisions that regulate the activities of the AP Funds in order to modernise and streamline the management of the buffer capital.
Gransbo is a seasoned professional who has previously been involved with similar complex investigations and drafting law proposals. He has until March 2024 to file his report and recommendations.
Although neither the government’s short press release nor the minister’s debate article mentions the AP Funds’ sustainability guidelines explicitly, potential changes in the governance structure will most probably impact all aspects of how the funds are managed – the more reason to watch this space.