AP1 has warned that reforms to the Swedish buffer fund system could lead to the “undesirable standardisation” of investment strategy and lower returns over the longer term.

Managing director Johan Magnusson, speaking as the SEK296bn (€296bn) fund announced first-half returns of 5.1%, highlighted the need to focus on a real return – targeted at 4% over a decade.

“That target we have overshot, delivering real return of 5.3% measured over the past 10 years,” he said.

Magnusson took aim at government plans to reform the buffer fund system, which, under current proposals, would see AP6 merge with AP2 and the closure of a second, as yet undecided fund.

The cross-party agreement announced over the summer also suggested the launch of a National Pension Fund Board, with a principal in charge of buffer fund assets and allowed to set the level of risk taken within the system by setting risk budgets.

The managing director warned the steps would lead to a greater focus on short-term investing and “undesirable standardisation” between the three remaining AP funds – echoing comments from AP3 managing director Kerstin Hessius that the reforms would make the system inflexible.

Mats Langensjö, chairman of the 2012 Buffer Fund Inquiry, has previously warned that the government’s reforms would see the funds deploy a passive, index-tracking portfolio over time.

Mats Andersson, Magnusson’s counterpart at AP4, has said the reforms could “destroy” the system, while AP2 managing director Eva Halvarsson has said the changes were “costly and risky”.

Magnusson also highlighted that AP1 had undertaken its first infrastructure investment in 2015 – acquiring a stake in a local electricity distribution network – arguing that the asset class was strategically important to his fund’s portfolio.

The reform proposals would also see responsibility for all unlisted assets transferred to AP2, with the funds asked to set up a joint investment committee to represent the other buffer funds’ interests.

AP1’s infrastructure portfolio returned 3.4% over the course of the first half of 2015, matching returns from developed market equities but underperforming its overall equity return of 6.7%.

AP1 is currently the smallest of the four main buffer funds and the only one not yet to have exceeded SEK300bn in assets.

However, it has achieved a higher real return over the past decade than AP3, which managed 4.8%, compared with 5.8% by AP2 and 6.1% by AP4, currently the largest fund, with SEK310bn in assets.

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