Negative Rates a Curse for Savers as Funds Sound Alarm in Sweden

The custodians of about $180 billion in Swedish pensions are warning that savers in Scandinavia’s biggest economy may not yet have grasped how profound the effect of negative rates will be on their retirement buffers.

Eva Halvarsson, the chief executive officer of the $37 billion AP2 fund, one of six that make up Sweden’s AP system, says the government may need to take some pro-active steps to prepare Swedes for the bad news. The guidance could be part of an evaluation slated to be delivered this month, she said.

Eva Halvarsson

Photographer: Anders Deros/AP2

“They have never commented on this issue in particular before, the interest rate situation, but I think they will do that now,” Halvarsson said in an interview. The government needs to “prepare the market for the fact that we can probably not have as high expectations for the AP funds or other investors.”

Sweden’s Riksbank is part of a club of monetary policy institutions spanning Switzerland to Japan that has resorted to negative rates either to revive inflation or drive down exchange rates. While the jury is out on the extent to which the policy can stimulate consumer prices or economic growth, it seems clear that the monetary environment is punishing savers.

With many of Sweden’s state pension funds, such as AP2, needing to stick to legislation that forces them to invest at least 30 percent in fixed-income securities, the search for higher-yielding, riskier assets is driving decisions for the remaining portion of their portfolios. The five biggest AP funds returned an average of about 5.6 percent last year.

Adding Risk

“In the remaining part, the 70 percent, we want to take quite a lot of risk,” Halvarsson said. Part of that has involved moving more into developing markets and into unlisted assets as well as to more “direct investments,” she said.  

In that regard, Swedish pension funds may be better off than others because they’re free to allocate more to equities, according to Richard Grottheim, CEO of AP7, which has about $33 billion under management.

“Of course returns will be lower during this period of low rates,” he said. AP7, which returned 6.2 percent last year, invests mainly in stocks where it spreads risk globally, but also in debt with an average maturity of two years. 

It’s “difficult to get good returns on those investments today, but we’re not too worried about that as the maturities aren’t so long,” he said. “It’s difficult for an investor to do anything about it.”

Real Estate

Efforts to generate higher returns are increasingly driving money managers into the property market. The $35 billion AP1 fund last year formed a real estate firm and even bought an electricity distributor as it managed to squeeze out a 4 percent return in 2015.

AP1 anticipates it will be able to meet its return target of about 4 percent, but anyone promising more will have a tough time, according to its chief investment officer, Mikael Angberg.

Promising savers 8 percent or 9 percent would be “completely out of touch with reality,” Angberg said.

According to Grottheim, Sweden’s low public debt level, which at 40 percent is less than half the European Union average, offers a little bit of a buffer against extreme negative rates as the government provides a little fiscal stimulus.

“We need another division of labor between central banks and fiscal policy than we have today, but levels of public debt today don’t allow that,” he said. “Except Sweden, that’s an exception.”

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