The foundation of Sweden’s pension system
The foundation of Sweden’s pension system is the national public pension, which is made up of two parts: income pension and premium pension. Income pension is a pay-as-you go system where the year’s pension contributions paid by the actively working population are used to pay pensions to pensioners during the same year. Premium pension is a separate part of the national pension where contributions are vested in the individuals’ own names, and the pension savers have a say in which funds their money will be invested in.
Bridging the generation gap
If the year’s contributions to the income pension system from people who are actively working are less than the year’s pension disbursements, the difference is taken from the AP Funds’ buffer capital, and vice versa. AP4, together with AP1, AP2, AP3 and AP6 manage this buffer capital. Since 2009 and through 2018 AP1-AP4 each paid out SEK 51 billion to the pension system. These payments from the AP Funds have been necessary mainly as a result of demographic factors, such as the large number of people born during the 1940s, who are now pensioners. The pension system has been designed specifically for this purpose. The system is also generation-neutral, that is, one generation does not benefit at the expense of another. The AP Funds are expected to continue making net disbursements to the pension system for another some 20 years. Thereafter, the AP Funds are expected to once again receive net inflows. If the pension system comes into a financial imbalance, i.e., its liabilities become larger than its assets, an automatic balancing is activated. As a result of this balancing, income pensions are lowered as long as the assets are lower than the pension obligations. A balancing affects both pensioners and those who are actively working. Such a balancing was activated in 2010, and it took until 2018 until the reduction in pensions carried out in 2010 was recovered.
Modernised investment rules for the AP Funds
In November 2018 Swedish Parliament (Riksdagen) decided on changed rules for the AP Funds, which took effect on 1 January 2019. The changes in the investment rules are planned to be implemented in two steps. The changes that have now been adopted pertain to the first step, which entails a modernisation of the investment rules for AP1-AP4. The AP Funds may invest a higher proportion of their capital in illiquid assets, the minimum required level of fixed income assets in the Funds’ portfolios has been reduced, and the requirement for external asset management has been removed. In addition, a stipulation has been added that the AP Funds are to manage pension assets in an exemplary manner through responsible investments and responsible ownership. The goal of exemplary management is to be achieved without the AP Funds compromising on the overarching goal of achieving a long-term high return. As a second step, the opportunities are being investigated for the AP Funds to make direct investments in unlisted infrastructure companies and illiquid credits, and co-investments in unlisted companies.
Guiding principles in AP4’s management
AP4 has unique prospects for long-term investment. AP4 makes sustainable investments with focus on the climate and environment, and takes ownership responsibility.
Over a long time horizon, the pension system’s need of disbursements is relatively predictable. AP4 therefore invests with a very long-term perspective, which provides unique opportunities to withstand market volatility and illiquidity.
A sustainability perspective is a prerequisite for long-term successful asset management. AP4 integrates sustainability with its Climate & Environment focus in its investment processes. In this way, AP4 achieves well considered risk, capitalises on business opportunities, and can thereby achieve a higher return over time.
Being one of the largest shareholders on the Stockholm Stock Exchange
entails both opportunities and responsibility. AP4 serves on nomination committees, takes positions on important issues and votes at general meetings of shareholders. AP4 has clear expectations for and carries on a close dialogue with the boards
and managements of the companies in which it is an owner.