SWEDEN - Board members sitting on Sweden's review of the AP buffer system argued in favour of the creation of a single fund as a "better alternative" but were handcuffed by government demands to maintain at least three of the five existing funds.

Reducing the number of AP funds has been hotly debated since their creation through a reform at the turn of the millennium, with the inquiry chaired by former investment consultant Mats Langensjö yesterday presenting its recommendations to reduce the number from five to three.

However, a clear majority of experts involved in the inquiry would have wanted all funds to be merged into  a single AP fund with assets in excess of SEK870bn (€97.5bn).

Speaking to IPE, Langensjö was open about the fact that seven of the nine panelists, comprising pensions and investment experts from across Scandinavia, would have liked to see the reform proposals go further - with their suggestion is that all current funds should be merged into one in order to fully benefit from cost efficiencies created by economies of scale.

"The seven experts have been critical of the proposal presented, and therefore me, because they believe a better alternative could have been put forward," he said.

"But the directive stipulated by the Swedish government was clear in that there should be a minimum of three funds. In order to stick to the mandate given this is the best outcome, in my opinion," he added.

Langensjö said that the difference of opinion created a "healthy" debate, with chief executive of Denmark's DKK754bn (€101bn) ATP Group Lars Rohde one of the advocates of a single AP fund.

The recommendation from the inquiry board included improving corporate governance, a clear division of responsibilities between the asset owner and the asset manager and replacing current quantitative investment rules with the prudent person principle.

The goal would be achieved by the creation of a new board with overall ownership of the funds assets, according to the report. Pensionsreservstyrelsen, or pension reserve board, would then set the investment objectives and targets together with Pensionsmyndigheten, Swedish Pensions Agency, the administrator of the Swedish national defined contribution system.

Langensjö said it was vital to establish a better connection between the general pension system and the buffer funds. "The 2008 crisis was a shock to the system and it became clear in many countries that it is important to have a model in place that can handle it and the questions asked since has focused on how to manage risk," he added.

He also pointed out that an over-reliance on the equity markets and lack of diversification had incurred costs through loss of performance. "Diversification is key in order to create a robust, truly long-term focused portfolio."

The Swedish AP funds themselves have for some time been vocal about the need for changes to their investment guidelines. In international comparison with equivalent funds, the Swedish buffer funds have an under-allocation to alternatives, in particular commodities and infrastructure.

"The worst case scenario is that nothing is changed," Langensjö said, noting that the changes may still take many years to implement, as acts of parliament were required.

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