AP7, Sweden’s rapidly-growing default pension fund in the premium pension system, has found a new way of dealing with the increasing asset management surpluses it has found itself with as a result of greater economies of scale.
Up to now, the fund – whose assets have more than doubled over the last five years – has returned those surpluses to its 4.5 million savers by lowering the fees it charges them on its equity and fixed income funds, the two building blocks which are used to compose the Såfa default option product.
The SEK1.1trn (€94bn) state-run pension fund announced yesterday: “Since AP7 Såfa replaced the Premium Savings Fund in 2010, the management fees have been gradually reduced as the managed capital and income in the fund company increased.”
“A level has now been reached where fee reduction as a method of managing the surplus is no longer a viable path,” it said.
“An even lower fee level impairs the possibilities of maintaining a stable and predictable management fee for savers,” the pension fund said.
AP7 has gradually been building up a buffer corresponding to twice its average projected fixed costs for the next five years, because – since management fees are its only source of revenue, and depend entirely on the size of the managed assets – if equity markets were to fall sharply and persistently it could be unable to continue operating without raising management fees or drastically reducing costs, the fund explained in its 2023 annual report.
“This goal has been reached, but as it is difficult to predict the global market development and the cost of the fund’s expansion into alternative assets, the board decided, in December 2023, on unchanged management fees for the AP7 Equity Fund (0.05%) and the AP7 Fixed Income Fund (0.04%) in 2024,” the fund said in the report.
In its announcement yesterday, AP7 said that as its income was expected to remain greater than costs for longer periods of time, in collaboration with the Swedish Pensions Agency (Pensionsmyndigheten), it had devised a new method for handling the surpluses.
“The collaboration has resulted in an adjustment function that returns any surpluses to the savers once a year,” AP7 said, adding that the first reversal of SEK458m would take place this month.
In the first of the potentially annual distributions, two thirds of AP7’s savers will have between SEK1 and SEK100 invested into their premium pension fund selection by the agency, with the other third receiving more, including a few hundred who will receive over SEK600 (€51) each, according to the announcement.
In 2023, AP7’s revenue from operations increased by around 10%, while its costs, including net interest, decreased by some 20%, according to its 2023 report.
The pension fund said in the report that its share of “capital-dependent” costs had fallen as a result of reduced costs for external management that was procured again during 2023.
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