Binding asset allocation of the reformed SEK1trn (€113bn) Swedish buffer fund system to a reference portfolio must avoid steering the AP funds towards an indexed investment approach, according to the government minister in charge of the measures.

Erik Thedéen, state secretary in the country’s Ministry of Finance, admitted that a recent cross-party agreement to reduce the number of AP funds from its current five to three was “pretty vague” on the introduction of a reference portfolio – a means of offering the remaining three vehicles a unified performance benchmark.

He told the upcoming issue of IPE magazine that the cross-party Pensionsgruppen was aware of the need to ensure the benchmark was specific enough to evaluate performance but not so binding as to “steer the investment on an indexed term”.

“That’s a balancing act, of course,” Thedéen said. “If you make it very, very vague, it doesn’t make any difference. If you make it very specific, there will be no room for the funds to manoeuvre.”

Mats Langensjö, chairman of the 2012 Buffer Fund Inquiry, previously warned that the use of a reference portfolio was old fashioned, and that the buffer system should instead be subject to more dynamic, risk-based targets.

Thedéen, a deputy to financial markets minister Peter Norman, also said the government was considering introducing a cost ceiling to the system, allowing the Swedish Pensions Authority, Pensionsmyndigheten, to exert limited control on investments under a revised system shifting from quantitative investment guidelines towards a prudent person principle.

“If they [the principal] only wanted to go for real estate, that would be extremely costly,” he said, noting that the principal would therefore be forced to seek approval for the approach either from Pensionsmyndigheten or the government.

“So that makes it possible to have some steering from the higher level to say we’d like to have these funds very lean and mean, or we would like to have more innovation, more cost.”

The state secretary nevertheless appeared to offer his support to a prudent person approach, noting that the Canada Pension Plan, with investment matters devolved to the independent CAD202bn (€137bn) Canada Pension Plan Investment Board, was a “good example” of a “very extensive operation and mandate”.

For more on the reform of Sweden’s AP fund system, see the May issue of IPE

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