SWEDEN - The Swedish government has criticised the first four national pension funds for their lack of diversification and low levels of risk-taking.
In a report to parliament evaluating the performance of funds, the government also said that management costs of the funds were high relative to their returns.
The study examining the scope and mandate of the AP funds is the first such review carried out since the funds were established in 2001.
Experts said that lack of diversification among the funds was worrying considering that the government had set up four different funds to encourage diversification in the system.
“The report has caused some disquiet. People are now asking why we need four pension funds which are so similar in their function,” said one official.
The report said: “The government notes that the returns so far have shown little deviation from the benchmark, which indicates a low level of risk-taking.
“The costs of managing the funds appear out of proportion to the degree of management activity, a point the government intends to keep a continued watch over.”
It said that low diversification could be due to the funds interpreting their assignments in a similar way, but an additional factor was that the funds had so far made little use of opportunities of active management.
“In conjunction with future evaluations, the government intends to come back to the issue of risk diversification between the funds and the associated question of the mutual independence of the funds,” the report added.
The report noted that the AP funds achieved good results in 2003, as a result of the upturn on the stock exchange.
The first four AP funds and the sixth AP fund, which together make up the buffer funds for the pension system, report combined earnings of SEK 80.8bn (e8.8bn) in 2003.
This compensates for a substantial part of the losses in previous years (SEK 85.6 billion in 2002 and SEK 26 billion in 2001).
In terms of yield, the funds returned 16.4% in 2003. The average return over the latest five-year period was 1.7% per year, which is 0.1 percentage points per year below
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