GOTEBURG, Sweden - Swedish automaker AB Volvo has rolled out its latest model: a 4.3 billion krona ($607 million) pension fund.
Actually, the pension fund is the first of two coming off the automaker's financial assembly line. It is designed to cover pre-1996 pension accruals for the company's white-collar workers. A second fund covering post-1995 benefit accruals will be funded with 400 million krona ($56 million) this month. Management of most of the assets likely will be outsourced.
For Swedish companies, which traditionally have relied on book reserving and life insurance to cover private pension benefits, a move toward advance funding is radical stuff. Volvo is only the second Swedish industrial company to set up a pension fund; state-owned telecommunications giant Telia AB created a 4 billion krona fund ($564 million) in early 1996. Swedish banks, however, long have maintained funded plans.
Other companies are watching closely, and might follow suit. A 1996 survey by consultant William M. Mercer AB, Stockholm, found 38% of 210 major companies said they are interested in creating separate pension funds, said Ola Larson, managing director.
A 1995 interpretation of the Industrins och handlens Tillaggspension, the collective bargaining agreement between the Swedish employers' association and trade unions for white-collar workers, opened the doors to advance funding. These supplemental top-up benefits comprise roughly 10% of the typical retirement package; the state pension, which is facing funding problems, comprises the rest.
Creation of such funds already is leading to outsourcing of most of the assets, with much more to come.
For example, Stockholm-based Telia Group created a fund a year ago for its largest unit, telecoms company Telia AB, a move observers say could pave the way for an eventual public sale of the state-owned company's shares. Telia AB's pension debt accounted for two-thirds of the group's 15 billion krona in pension liabilities - about 27% of the company's total obligations.
As a result, the company contributed 4 billion krona to the newly created fund last year, said Leif Hollstedt, president of the Telia Pension Fund, whose liabilities since have grown to about 13 billion krona.
Another 3 billion to 4 billion krona might be contributed during 1997, depending on various conditions, he said.
Telia pension fund officials decided to invest 40% of assets in Swedish fixed-income and 60% invested in equities, equally split between domestic and international stocks. Enhanced returns from equities eventually could lower the company's pension costs, Mr. Hollstedt explained.
The fund last year picked six external money managers to manage portions of the fund: one in fixed-income, three in Swedish equities and two in international equities. In addition, the company's internal treasury department runs a portion of the fixed-income assets. Mr. Hollstedt declined to reveal which managers were hired.
For Volvo, the situation is a bit different. Three years ago, the Forsakringsbolaget Pensionsgaranti, a Swedish mutual insurance company that backs pension obligations of 2,500 Swedish companies, could not underwrite Volvo's entire pension liability.
After additional coverage was secured, Volvo put together a team of tax, legal, finance, human resources and accounting personnel to explore the company's options. The best option was to create a separate pension fund, said Eddie Dahlberg, managing director of the Volvo Pension Funds.
As a result, last July the company transferred 4.3 billion krona to its newly created fund for pre-1996 liabilities, wiping most of the pension debt off of the balance sheet. Volvo, which is cash-rich from selling off 35 billion krona in non-core operations since April 1994, easily could afford to make the pension contribution.
The ability to invest in equities will enable Volvo to cover inflation-adjusted pensions and changes in mortality, keeping pension liabilities off the balance sheet. Investing in stocks was not a viable option when the pension debt was on the balance sheet: the potential volatility was unacceptable.
In addition, generating pension fund surpluses makes it easier to finance early retirement programs without straining the profit and loss account, Mr. Dahlberg noted.
The new fund covers 24,500 participants of whom 15,000 are active workers.
The second pension fund will cover post-1995 pension liabilities. Administration is outsourced to giant insurer SPP in Stockholm.
Mr. Dahlberg said pension officials still are working out the details of their investment strategy, but it's possible the fund will seek to invest between 40% and 80% of assets in equities.
Assuming a 50% target allocation to equities, anywhere from one-fifth to three-fifths of that amount likely will be invested abroad, he added. The rest of the fund will be invested in Swedish bonds, although fund officials might consider alternative asset classes.
Now, about 10% of assets are invested in equities, with a 50/50 target split between domestic and international. SPP is conducting an asset/liability study for the fund, due by the end of the first quarter. Depending on market conditions, the fund could be up to its benchmark allocation sometime this year, Mr. Dahlberg said.
Volvo's treasury probably will outsource about 80% of the assets to external managers, with the remainder being invested internally in both stocks and bonds. Volvo's treasury department has managed the money on an interim basis, although they would be considered a possible manager of the fund's money market portfolio. The fund already has hired two Swedish managers, whom Mr. Dahlberg declined to identify.
Once the asset/liability study is completed, international equity will be the next asset class visited, possibly starting in March. The fund is not working with an external consultant, although Mr. Dahlberg said officials might consider doing so.
Meanwhile, Mr. Dahlberg is contemplating merging 8 billion krona ($1.13 billion) in assets from about a dozen Volvo foundations, responsible for paying everything from research grants to company bonuses.
While the funds have differing investment horizons, economies of scale could be obtained from combined record keeping and use of common money managers.