AP funds face consolidation as report flags scale and efficiency wins

A long-awaited review of Sweden’s buffer funds has proposed consolidating AP1, AP3 and AP4 into two funds.

Stating that the “advantages outweigh the disadvantages,” Tord Gransbo, an adviser to Sweden’s Ministry of Finance working on the review since last October, argued that consolidation would create efficiencies and scale, effectively managing the capital in the long term for a higher net return.

The many similarities of the three Stockholm-based funds (AP2 is based in Gothenburg) include their gradual move towards comparable asset allocations, assets under management (between $44 and 47 billion each) and increased co-investment. Moreover, Gransbo noted that they employ similar numbers of staff in the same job categories and compete against each other for sought-after staff.

In other shared seams, the funds have deepened cooperation on environmental and ethical issues through the Council on Ethics.

“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,” states the report, in Swedish.

“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.”

Gransbo flagged the complex process around consolidation would incur considerable direct costs and significant implementation risks that could impact returns.

The report did explore the benefits of greater cooperation (rather than consolidation) between the Stockholm funds. This would create cost efficiencies and reduce the risks that come with consolidation. However, Gransbo noted that the consolidation proposal carries a significantly greater potential to improve management of the buffer capital, which would, in the long run, contribute to a higher net return.

The report did not single out any of the three funds as a candidate to be split up. The report will now be consulted on, and the all-party Pensions Group will decide the actual shape of any changes to the system.

“We will now read very carefully and analyse the proposal and will of course assist in the formal consultation process that will soon commence,” a spokesperson for AP4 said.

“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.”

In addition, the report proposes changing the structure of the AP Funds’ boards, highlighting a possible reduction in board members and the requirement of specific skills.

AP6 benefits

Grasbo said his preference is to maintain the current organizational structure of small, private equity specialist AP6.However, he suggested AP6 should be integrated into the wider 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 chief executive officer Katarina Staaf said the review points out that the expertise of AP6 should be scaled up and that AP6 should be fully integrated to 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,” Staff said.

“All are necessary changes that we welcome.”