Sweden needs to reduce its number of state pension funds to lower costs and improve returns on about $131 billion in assets being managed for the Nordic nation’s retirees, a government-appointed committee said.
The group, appointed last year by Swedish Financial Markets Minister Peter Norman, recommended that the number of AP funds be cut to three from the five, according to a report released to today in Stockholm. A new agency should also be created to oversee the funds, according to the report.
The parallel structures, poor governance and current investment rules have reduced annual returns by at least 1 percent, or 9 billion kronor ($1.35 billion), and added about 250 million kronor to costs. The committee also presented an alternative of merging the funds into one.
“The AP funds are outdated and characterized by an antiquated approach to asset management,” Mats Langensjoe, the group’s head, said today in an opinion article in newspaper Dagens Nyheter.
The five buffer funds, called AP1, AP2, AP3, AP4 and AP6, manage 870 billion kronor ($131 billion) and are tapped when pension payments exceed tax deposits. The government in May criticized the funds, which date back to 2001, for not having reached their targets and called the performance over the past five years of at least three “unsatisfactory.”
Pension payments exceeded tax income set aside for retirees for a third consecutive year in 2011, while the funds’ annual return averaged 3.3 percent, the government said.
The rule that each fund is not allowed to control more than 2 percent of the Swedish stock market should remain intact to reduce concerns of power concentration, Langensjoe said.
The anticipated report had stirred up a debate in Sweden and prompted economist such as Assar Lindbeck, a professor of economics at Stockholm University, to warn of dangers of political meddling in the nation’s pension assets.
“If there is just one big state fund the concentration of power in the Swedish financial markets will become colossally big,” Lindbeck, 82, said in a phone interview before the recommendation. “If there is one big player on the market who can buy shares and that way gain influence at companies, then politicians won’t be able to resist the temptation to start meddling.”
The funds should be kept apart and invest more in index funds to reduce management costs that are higher than they would have been with a single fund, said Lindbeck, whose friendship with former Prime Minister Olof Palme ended over a spat over the creation of national labor funds. Palme was assassinated in 1986.
The objections stem from when the Social Democratic party, backed by Sweden’s largest blue-collar union, forced companies to pay into union-backed funds to boost worker influence. The funds were later disbanded.
“In a situation where the AP-Funds’ combined ownership on the Swedish stock exchange is 1.7 percent of the combined stock exchange capital, the discussions about a power concentration are less relevant,” Langensjoe said.
Sweden was the first country to in 1913 legislate a guaranteed state pension. In 2001, the pension funds became independent from one another with individual placement, ownership and risk policies.
“I used to work in the financial markets in 1995-1996 when there only was one big AP fund and I remember that it was very dominant,” said Mats Dillen, who heads Sweden’s National Institute of Economic Research. “We at least thought that their strategy choices had a very large market impact.”
Labor unions also agree that the funds should be kept largely intact.
“It’s good to spread risks by having several funds and it’s also good that the AP funds are relatively active as owners” with “an interest in companies’ development and long-term performance,” said Torbjoern Haalloe, an economist at Sweden’s largest trade union, LO. “It would be unfortunate if too much was invested in passive index funds.”