SWEDEN - The Swedish Ministry of Finance has confirmed that it is considering consolidating some aspects of administration of the AP funds in a move to rein in escalating costs.
This follows a flat denial four months ago by the then minister for financial markets, Gunnar Lund, who at that time told Global Pensions,that the ministry would not “toy with any ideas like that”.
Sven-Erik Österberg, the new minister for financial markets, said that the government was considering merging some aspects of administrationsuch as back office functions.
He added that the ministry was engaged in discussions with the four funds as to how their costs may be reduced. In 2003, the AP funds incurred costs of Skr1.2bn (e133m), which rose to SKr1.5bn last year.
Österberg, like his predecessor, is against the idea of merging the four buffer funds: “We should continue to have four funds. When we setup the funds, we wanted to spread risks and hence we had four different funds. But if you put all your money in one fund, then the risk will be concentrated in just one fund.”
However, critics of the system argue that funds should be merged or reduced to bring down costs and minimise the “quadrupling effect”.Others have pointed to the lack of active risk taking andpoor diversification among the funds as reason for a merger.
Daniel Barr, former project leader for the AP-fund reform, now chief economist at the Premium Pensions Authority (PPM) said: “A governmentreport last May said that the correlation between the AP funds was close to 1.0 and the report recommended that the AP funds should take on more active risk in order to be more diversified.
“I can't see that as a solution and I think we should start to discuss whether there is a need to reduce the number of AP funds going forward.”
Thomas Franzén, chairman of the PPM and former deputy governor of theSwedish Central Bank, is calling for an absolute return target to compel the funds to behave differently.
He said: “If they [AP funds] continue to behave in the same way then I believe merging is an option. But before we start that discussion, Ithink we should discuss introducing, say, an absolute return target as compared to a benchmarked target system.
“This is because even if you have the same liabilities, then there is still the possibility of handling different types of strategies. But if the strategies are the same and the liability is the same, then it is difficultto argue why you need so many funds for doing exactly the same thing.”
A finance ministry official who did not wish to be named added: “The issue is a highly political one. The Implementation Group comprising representatives of the five parties, which backed the pension reform agreement, is expected to discuss this issue in May.
“But four of these parties are still in favour of having four funds as opposed to one, so it may be very difficult to merge the funds, but merging the back-office functions could very well be the answer.”
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