Legacy of the Swedish pension reform that never was

A plan to reform the Swedish public pension system proved to be too contentious to be implemented.

As the managers of more than a trillion Swedish krona (more than EUR 100 billion) of public pensions money, it is not surprising that the activities of the five national pensions buffer funds – AP1 to AP4 and AP6 – are constantly in the public eye.

Never was the public scrutiny more intense than during the years of proposed reform to the AP buffer fund system leading up to December 2015 when the plans were unexpectedly shelved.

The ideas that came up for discussion were as far-reaching as they proved contentious.

Eventually, though, the government and opposition parties in Sweden could not agree on how to proceed with the reforms, and the government canceled all plans that had formed part of the discussions.

Under the plans, AP6 – which is based in Gothenburg, invests solely in private equity, and is much smaller than the first four funds – would have been closed.

A second AP fund would have gone as well, leaving three funds still running.

Opposition to pension reform plan

Influential voices criticized the plans including the Confederation of Swedish Enterprise and the central bank, saying inter alia that the proposals would harm the stability of the buffer fund system and make long-term investment difficult.

The funds have since been left to get back to business without the threat that one of them could imminently be axed, but some matters discussed in the reform process are still looking for a solution.

The four main buffer funds feel constrained by their regulation on investment in private assets and fixed income, which involves a fixed 5 percent limit on private assets except property, and the stipulation that 30 percent of assets must be held in investment-grade bonds.

The buffer funds believe these limits should be relaxed to give investment flexibility particularly in the light of the current very low interest-rate environment.

But the idea from the abandoned reform that the funds should increase their cooperation to lower costs and increase the level of common expertise appears to be alive and well.

Johan Magnusson, Chief Executive of AP1, said in the fund's last annual report that the first to fourth AP funds had continued to develop their cooperation over the course of last year.

"The aim is to create synergies, achieve increased cost-effectiveness, and ensure a relevant exchange of experience, knowledge and working methods between the funds," he said.

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