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21 August 2012

IPE: AP fund investment regulations should be replaced with prudent person approach

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A review of Sweden's AP funds has recommended the abolition of current quantitative investment regulations, replaced with the prudent person principle in order to boost performance, governance and flexibility of the country's buffer system.

Headed by chair Mats Langensjö, the review of the four main AP funds as well as AP6 suggested the creation of a new authority with overall responsibility for the five buffer funds' current €97.5 billion in assets. The new pensions reserve board, or Pensionsreservstyrelsen, would be the asset owner and responsible for setting the targets of the funds.

The inquiry board argued that the lack of a clear principal or asset owner with a unified role, appropriate investment guidelines and the fact that the funds set their own targets according to which they managed assets resulted in cost increases and reduced overall returns.

In order to strengthen the buffer funds links to Sweden's pension system, targets would in future be set in conjunction with Pensionsmyndigheten – the Swedish Pension Agency – which administers the national defined contribution system PPM. The remaining three boards of each buffer fund would, in turn, have identical mandates to maximise return within the risk parameters that the new reserve board and pension agency sets.

An improved governance model would also allow for the replacement of existing quantitative investment rules with a more "appropriate" prudent person principle – to improve flexibility for the asset management of capital and thereby benefit the pension system in general, the report said. As a result, the asset management could therefore be developed and adapted to current circumstances on the capital markets and the financial position of the pension system at any given time, it said.

Langesjö said in a statement that the current quantitative investment rules were adopted at a time of different market conditions. "Today they are working against the original purpose of limiting risks in the asset management at a significant cost for existing and future pensioners."

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© IPE International Publishers Ltd.

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