SWEDEN -- Sweden’s new financial regulatory ‘traffic light’ system could destabilise the fixed income market if it is not amended, according to Alecta, the largest occupational pension company in the Nordic region, with €37bn assets under management.
Alecta, one of the region’s biggest investors in fixed income, has told the Swedish financial supervisory authority (FI) that its current proposals would mean that pension funds and their insurers would find it impossible to reduce interest rate risk other than by investing in Swedish government bonds.
It said that the proposals were in conflict with the basic philosophy of the EU pensions directive, in particular the ‘prudent person principle’, which gives pension funds greater investment freedom.
Alecta is asking the FI to relax its proposals, and to allow pension funds to use a wider range of fixed income instruments to reduce interest rate risk.
Staffan Grefbäck. chief investment officer of Alecta, said: “The FI’s traffic light system is guided by the best intentions and the development has been welcome. However, to formulate a monitoring tool which builds in a risk of destabilising the market is not compatible with the FI’s responsibility to protect the consumer interest.”
Grefbäck said that the FI must be made aware that the traffic light would have a substantial impact on the way the pensions sector chose to formulate its future asset allocation strategies.
“The fact that the monitoring will take into consideration each individual company's special conditions is no defence against the overall effects of the system,” he said. “An entire sector cannot reasonably be considered to have special conditions
“It is therefore important that the model’s general governing effects do not affect stability on the markets.”
Grefbäck said the FI’s treatment of foreign interest risk would have the effect of making the traffic light system more complicated and could lead to a destabilising surplus of Swedish government bonds.
Alecta has proposed two changes that it says will simplify the traffic light model and at the same time protect the consumer interest.
First, it has asked the FI to restore euro bonds to permitted investments in line with an earlier draft of the proposed traffic light system.
Second, it has asked the FI to widen the permitted credit spread; that is, the difference in interest between a credit risk allocation and a risk-free allocation.
The FI will announce details of the final version of the traffic light system on 8 November.
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