SWEDEN - Rapidly escalating costs in running the AP funds have prompted the Swedish government to prod the funds into considering some of consultant KPMG's recommendations, including one to merge the back office functions.
In its annual report to parliament evaluating the performance and costs of the funds, the government said that it intends to “initiate a dialogue” with the funds’ boards with the aim of improving cost effectiveness. Costs of managing the AP funds amounted to SEK1.5bn (US$206m) in 2004.
Earlier this year, the government appointed KPMG to provide a comprehensive evaluation of costs. One of the consultant’s more radical recommendations was a possible merger among the funds to reduce the duplication effect and cut costs. The government said that such a move is not on its agenda.
However, other measures such as increasing co-operation in activities such as procurement of managers; oversight of management structure; increasing outsourcing; merging of back-office functions and budget restrictions on the lines of the Norwegian Petroleum Fund would be “actively discussed” with the funds, the government said. The AP funds had reacted angrily to KPMG’s recommendations, dismissing them as “harsh and unfair”.
“The government intends to, when necessary, suggest additional measures in order to improve the funds’ cost effectiveness,” said Sven-Erik Österberg, minister for financial markets.
“KPMG’s evaluation confirms that the management activity is not in line with the costs of the AP funds. KPMG also draws the conclusion that the management costs of the AP funds exceeds, in comparison with benchmark costs, other Swedish, British and Dutch life insurance companies and pension funds,” the government report added.
The report also noted that the funds had recouped its earlier losses and the accumulated results since 2000 are now positive.
The funds posted a return of SEK63.7bn in 2004 and since the amount of contributions exceeded the amount of pension payouts, total pension capital increased by SEK69.3bn to SEK646.2bn.
On average, the funds returned 10.9% in 2004, but during the five year period between 2000-2004, the funds returned on average 1.7% a year in line with inflation, translating into a flat return during the period.
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