More changes to AP funds’ investment rules on the horizon

Sweden’s AP funds should be allowed to invest directly as part of a continued modernisation of their investment rules, according to a government-commissioned report.

Consultancy group McKinsey said in an annual evaluation of the six AP funds (AP1-4, AP6 and AP7) recommended more “modernisation” of the funds’ investment rules, bolstering the case for them to be allowed to make direct and co-investments.

The report, commissioned by the Swedish government, referred to new rules in force for AP1-4 since 1 January 2019 and said the updating exercise should continue.

Discussions are already under way among legislators for the funds to be allowed to invest directly, following calls from the funds themselves for more scope to make such investments.

In the report, McKinsey said: “In the context of the amended regulatory framework, it is considered important for the Ministry of Finance to evaluate and make informed decisions about the possibility of the funds investing in specific asset classes and investment models (for example, unlisted credits, direct ownership in assets other than property, or co-investments with external fund managers in unlisted companies).

“In today’s regulations, the AP funds’ ability to invest in, for example, unlisted credits and to invest directly in unlisted assets (in addition to real estate) is limited.”

In granting the funds this freedom, attention should be paid to the expertise available, at both executive and board level.

McKinsey said: “Possible areas to investigate are the prerequisites for attracting the right mix of expertise over time within the AP funds’ boards (including global asset management and investments in unlisted assets such as real estate, infrastructure and unlisted companies), as well as the funds’ ability to attract, over time, specialist skills for investment in unlisted assets in the investment organisations (for both direct and co-investment).”

Fast-growing AP7 due for an update

AP7’s opportunities and risks were also changing as it continued to grow, the consultancy added. AP7 runs the default fund in Sweden’s first pillar defined contribution platform, the Premium Pension System (PPM).

“The investment rules for [AP7] should therefore be investigated, in order to ensure that the fund has the best opportunities to generate a high risk-adjusted return for premium pension savers,” McKinsey said. It added that AP7’s ability to invest in unlisted assets, such as real estate and infrastructure, was currently limited.

Johan Florén, head of communications at AP7, told Swedish news service Pensionsnyheterna: “It is a good suggestion to look at whether the restrictions should be removed… Investments in, for example, properties and infrastructure could both lead to better diversification and more green investments.”

Florén added that it was hardly optimal from a financial perspective for savers to have daily liquidity in the default PPM fund on their entire capital for 40 years.