A highly anticipated review of Sweden’s buffer funds has recommended merging AP1, AP3, and AP4 into two consolidated funds. The review, spearheaded by Tord Gransbo, an adviser to Sweden’s Ministry of Finance, has been in progress since last October. Gransbo argues that the consolidation would enhance efficiencies and scale, ultimately managing the capital more effectively for a higher long-term net return.
Gransbo highlighted the many similarities between the three Stockholm-based funds, which include their gradual move towards similar asset allocations, each managing assets between $44 and $47 billion, and increased co-investment. Additionally, the funds employ comparable numbers of staff in identical job categories, often competing for the same highly sought-after personnel. AP2, however, is based in Gothenburg.
The funds have also deepened cooperation on environmental and ethical issues through the Council on Ethics. Gransbo noted, “The high degree of similarity means that there are good opportunities to achieve economies of scale in asset management through consolidation or mandatory administrative cooperation.”
The report, written in Swedish, states, “The consolidation proposal has a much greater potential to improve the conditions for efficient, rational, and effective management of the buffer capital and thereby contribute to a higher net return in the long term.”
However, Gransbo cautioned that the consolidation process is complex and would incur significant direct costs and implementation risks that could affect returns. The report also explored the benefits of enhanced cooperation (rather than full consolidation) between the Stockholm funds, which could create cost efficiencies and reduce the risks associated with consolidation. Despite this, Gransbo emphasized that consolidation holds a greater potential for improving buffer capital management, contributing to higher net returns over time.
The review did not identify any specific fund for division. The report will now undergo consultation, and the all-party Pensions Group will determine the final structure of any changes to the system.
“We will now read very carefully and analyze the proposal and will, of course, assist in the formal consultation process that will soon commence,” said a spokesperson for AP4. “It is good and natural to regularly review the management of the public pension system’s buffer capital, and we welcome the fact that ‘Pensionsgruppen’ has started to review how the pension system can be developed and strengthened.”
Additionally, the review proposes changes to the structure of the AP Funds’ boards, suggesting a possible reduction in board members and the inclusion of specific skill requirements.
AP6’s Role and Recommendations
Gransbo expressed a preference to maintain the current organizational structure of the small, private equity specialist AP6, but he recommended integrating AP6 into the broader buffer fund system.
“The Sixth AP Fund has not been integrated into the buffer fund system. It is high time that this happened,” he said.
AP6 CEO Katarina Staaf acknowledged the review’s suggestion to scale up AP6’s expertise and integrate it fully into the Swedish buffer system. “One way of doing this, according to the review, is to remove today’s legal requirement of currency hedges, to allow inflows and outflows linked to the pension system and to open for AP6 to be enabled to borrow from The Swedish National Debt Office [Riksgälden], who is the central government financial manager,” Staaf said. “All are necessary changes that we welcome.”
As the consultation process unfolds, stakeholders will analyze and provide feedback on the proposed changes, aiming to enhance the efficiency and effectiveness of Sweden’s buffer funds.
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