Beginning next year, Sweden’s four buffer pension funds will be able to allocate less to fixed income and invest more in illiquid assets should the new investment guidelines proposed by the finance ministry and recently approved by the Council on Legislation receive parliamentary approval.
The new guidelines include reducing the minimum requirement for fixed income investments from 30 percent currently to 20 percent of a pension fund’s total portfolio. At the same time, the four state pension funds – AP1, AP2, AP3 and AP4 – will be able to allocate 40 percent of their total AUM to unlisted assets, a significant increase compared with the 5 percent they are currently allowed.
“This will give the AP Funds [the] ability to allocate away from low-returning fixed income and into illiquid [assets] and alternatives,” Tobias Fransson, AP4’s head of strategy and sustainability, told Infrastructure Investor. “However, this can still only be invested through funds,” he added.
Fransson explained the investment guideline reform will happen in two stages. The first step, which includes changing the allocation requirements and allowances, as well as a provision for sustainable portfolio management, will be presented to parliament before the summer.
Asked to elaborate on the sustainability requirement, Fransson replied that AP4 bases their definition of sustainability on the Brundtland report. “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs,” he said, citing the report the UN’s Brundtland Commission released in October 1987.
The second step, which Fransson described as “very important” will be further analysed in the autumn, and will allow the four buffer funds to invest directly in infrastructure companies, co-invest in unlisted companies and invest in illiquid credits, among other things.
“Step 2 is a very important complement to step 1 as this will give the AP funds the ability to invest very long term, cost effective and in line with international market practice,” Fransson said.
The increase in allocation to illiquid assets is expected to come into effect on 1 January 2019, while the changes to investing directly in unlisted assets are set to be implemented on 1 July next year.
While the reforms are still pending parliamentary approval, they have already received a green light from the Pension Group, a Swedish multi-party parliamentary working group that has agreed the investment rules for AP funds need to be modernised.
“The current investment rules for the Swedish National Pension (AP) funds are based on conditions prevailing in the 1990s,” the group wrote in a memorandum last December. “In several respects, updating of investment rules is necessitated by changes that have taken place in and around the financial market. These changes would enable the funds to invest responsibly and sustainably to maximise the return for the pension system and optimise pensions,” the group stated.
According to AP1’s website, the capital reserves of the buffer funds “are used to cover the deficit when disbursements from the pension system exceed contributions to the system”.