Reform to Sweden’s pension market has made it one of the more dynamic in Europe, particularly since the introduction of the PPM system last year. Growth in the market continues unabated and overall assets are up from 77% to 112% of GDP in the past four years. According to a survey by Merrill Lynch, only Ireland, the UK and the Netherlands have produced more reform than Sweden and since the launch of PPM, Latvia has emulated the approach and established its own similar second pillar scheme.
Investment profiles of the AP funds have been well-documented and managers have already been appointed to run the assets. One of the more interesting developments is the decision by AP7, the default fund for investors opting not to pick their own funds, to blacklist 30 companies from its equity portfolio earlier this year following a scathing report on their environmental and ethical records. According to Peter Norman, managing director of AP7, reasons for excluding the stocks ranged from discrimination of women in a company’s workforce to manufacturing landmines.
When the government established the AP funds, it stressed asset allocation should consider both environmental and ethical issues. Unlike most other ethically invested funds though, AP7 has not barred tobacco, alcohol and firearms companies from its portfolio, on the grounds that a lot of people drink and smoke, and also because the government is manufactures and trades arms.
According to the fund, its decisions are based on court judgements, official investigations or direct admission on the part of the companies’ management after investigations into their human rights records. Norman hopes that the move will help encourage those excluded to see the errors of their ways and to change their production, employment policy or whatever was felt to be lacking in the first place. Socially responsible investing is often accused of affecting performance but Norman says the exclusion of the 30 companies on the black list, would have cut the fund’s returns by only 0.1% during two-years they were included in its portfolio.
Elsewhere, Sweden’s Handelsbanken has bought the life and insurance business of its competitor the mutual insurance company SPP for SEK7.1bn (E815m). As a result of the deal, Handelsbanken has become the largest commercial bank in the country’s occupational pension sector and will now manage approximately 35% of all occupational pensions premiums. Assets under management has jumped from SEK90bn to SEK250bn.
SPP was forced to sell its life and insurance operations after coming under fire from the Swedish agency for fair trade, who criticised its role as a monopoly. The purchase comes at a time when Sweden’s life insurance companies are taking a battering. Investment returns of life insurance companies hit a six year low in 2000 with insurers’ investments returning 4.9% last year compared to 20.2% in 1999.
On the consulting side and William M Mercer closed its investment consulting operation last year, much to the advantage of local firm Wassum which goes from strength to strength. Of the four Nordic markets, Sweden remains the most willing to employ consultants and according to the latest Greenwich Associates report, 53% of institutions employed consultants in some way during 1999. This rose to 58% last year, taking it way above the European average of 32%.
There are in fact no legal requirement for funds to use a third-party consultant and many local consultants believe they have to sell themselves hard and to demonstrate they are worth their fees. Mercers is not alone in that many of the other larger consultants run their operations out of London. This, however, is not stopping them from winning mandates and, when the larger ones come up for grabs, they are often in the running. Many of the municipalities have used them for manager selection and PPM’s default fund used Mercers for manager selection, Watson Wyatt for asset allocation and, in setting up the system, KPMG and Wassum.