Sweden Launches Review of Buffer Funds

Ashby Monk

Sweden’s government will soon launch a broad review of the country’s five pension reserve funds (aka the “buffer funds”), which together have roughly $150 billion in assets under management. Here’s a blurb describing what’s up:

“The government’s “pensions group”, which includes representatives of all five of the country’s mainstream political parties, will look at the investment rules of the funds – and even whether there are enough or too many of them.”

As you may have guessed, the buffer funds exist to buffer the state’s budget from looming pension liabilities. There’s nothing too unique about that, as Canada, New Zealand, Ireland and others have similar institutions. However, what is interesting about the Swedish case is the fact that the government split up the pension money among five different funds to encourage competition and diversification. (It’s actually a really cool idea.)

However, the funds don’t end up being very different. Because they are so transparent, they can, for the most part, align operations and copy one another’s successful investment policies. In addition, the investment rules prevent some variation as well — not to mention preventing the kinds of investment policies that one might expect to go with a long-term approach (i.e., illiquids).

So, I think a review is probably a good idea. It was probably time to do one anyway; the funds have been operating for a decade now, which means there are probably plenty of lessons learned that could be applied.

The main focus of the review appears to be two-fold:

  1. To determine whether the funds should have less restrictive investment rules. As it stands, the buffer funds are prohibited from investing more than 5% of their money in unlisted assets. This means they are under-weighting private equity, infrastructure, real estate, and so on. And they can’t invest in commodities full stop.
  2. To examine whether Sweden needs five buffer funds for one pension system: AP1, AP2, AP3, AP4, and AP6. As you might imagine, one of the objectives of the review is to see whether some consolidation is warranted.

My take: The review should remove the restrictions on investments in unlisted assets and on investments in commodities and let the funds take a truly long-term investment approach. And I also think that some consolidation is probably necessary in order to benefit from economies of scale. It seems that bigger is better for institutional investors these days; why not leverage that competitive advantage? Anyway, for some additional thoughts on how to reform Sweden’s pension system, read this interesting paper.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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