SWEDEN - Furious at KPMG's government commissioned report on costs, the Swedish AP funds have decided to carry out their own internal evaluations of costs and have appointed the Canadian-based CEM to carry out a separate cost review in each of the four buffer funds.
KPMG’s controversial report said that the cost of running the AP funds (AP1, AP2, AP3 and AP4), which sits at some 18.1bp, was 7.7bp higher than the industry benchmark.
Among some its recommendations which drew a furious reaction from the funds, KPMG proposed that the government consider a possible merger of the funds, merger of back office functions and budget restrictions to cut costs.CEM’s evaluation of the funds will be broadly along the same lines as that of KPMG’s review and will include a valid comparison or benchmarking of the level of costs in the funds, portfolio structure and the composition of internal management versus external management.
CEM will also examine the costs in the buffer funds against other comparative pension funds.
As Björn Linder, AP4’s CIO puts it, the review will “basically compare apples with apples instead of apples with oranges.”
One of the major criticisms levelled against KPMG’s evaluation is that its “industry benchmarks” were Swedish pension insurance companies and Dutch and British pension funds.
Linder said: “There has been a lot of debate on costs and how the AP-funds measure up globally.
“The four AP-funds started 2001 with new investment guidelines and a new organisation structure, and since then have been building up four different investment organisations.
“From the start, AP1-4 cooperated in some areas, but being competitors, we built four separate organisations.
“Now we have intensified the cost issue, therefore it’s good to have a relevant benchmark. AP1-4 appointed the consultant CEM to get a good benchmark to see where we can be even more cost efficient.”
Kerstin Hessius (pictured), AP3’s CEO added: “The main problem with KPMG’s evaluation is that it has not looked into the individual pension funds, it has the aggregate of the four pension funds.
“So it’s really hard for us to study it individually and in relation to a benchmark.”The other issue highlighted by Hessius is that unlike the reference portfolios, the AP funds also include VAT and private equity management fees in their total costs.
“In AP3’s case, if we deduct the private equity management fees, VAT and variable fees to external managers then we are at the same level as the KPMG benchmark,” said Hessius.
She added: “Of course we are interested in following up on our costs and we want to do this on an individual basis for each fund.
“To manage costs is as important as managing assets and this review is an instrument for us to develop our management of costs.
“But we have to start somewhere and we have to look at our cost structure compared with other pension funds.”
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