STOCKHOLM, Sweden -- Roughly 50 billion Swedish kronor ($6.2 billion) will be up for grabs by money managers under a proposal to revamp AP Fonden, the giant state pension system here.
The restructuring would lead to a dramatic change in investment strategy for the 744 billion kronor ($91.6 billion) funds, liberalizing investment rules and requiring at least 10% of assets be run by external money managers.
The AP funds are heavily weighted toward Swedish bonds. The assets are almost entirely internally managed.
If adopted by Parliament, the changes likely would result in much higher allocations to equities and foreign securities.
The proposed changes are designed to increase returns and spread risk for AP Fonden, according to a government statement.
"It's very much a step in the right direction," said Andreas Lehmann, managing director of global sales and marketing for Merrill Lynch Mercury Asset Management, London.
"What you're seeing is a developing market but a great opportunity for Sweden to leapfrog that and get into best practice quite quickly," said Eric Steedman, a principal in the international consulting practice at Watson Wyatt Worldwide, Reigate, England.
The proposed reform is part of a radical overhaul of the entire Swedish pension system, including formation of funded corporate and public funds.
As part of a complex budgetary process, a total of 258 billion kronor will be transferred to the state budget from AP Fonden to help finance the changes, said Ole Settergren, head of the social insurance department of the Ministry of Health and Social Affairs, Stockholm. The effect will be to reduce AP Fonden to about 520 billion kronor.
Under the proposal to restructure the state pension system, five of the AP Fonden's six funds would be consolidated. They then would be reconstituted into four equally sized funds of about 125 billion kronor each with a common set of investment rules. The proposal, if approved, would become effective Jan. 1, 2001.
The restructuring of the five funds would radically affect their investment capabilities. Currently, the funds, while covering the same workers, are structured to invest in different asset classes. (The sixth fund, with 12 billion kronor almost entirely invested in Swedish private equities, would remain separate.)
The combined funds 1-3, which hold the vast majority of assets, are 95% invested in fixed income, almost all Swedish government bonds. The balance is invested in real estate. The fund is switching its direct real estate investments to indirect holdings. It is also seeking to hire a manager to run a $100 million U.S. investment-grade bond portfolio.
AP Fonden 4, with 89 billion kronor, and AP Fonden 5, with 14 billion kronor, are almost entirely invested in equities, most of which are Swedish stocks.
Fixed-income investments would comprise a minimum of 30% of assets for each of the four funds. Total foreign currency exposure would be capped at 40%, up from 10% now for the combined 1-3 fund. However, there would be no investment limits on the underlying assets. There would be no restrictions on overall equity investments, although the minimum bond requirement effectively would cap stocks at 70%.
However, the rules would limit each fund's investments in domestic stocks to no more than 2% of the total market capitalization of the Swedish Stock Exchange. At current values, that would cap aggregate domestic equities at 190 billion kronor. This limit addresses the sensitive issue of how much influence the funds would have on the domestic market.
Money managers also will have the opportunity to gain assets under the broader overhaul's new individual account system.
Starting in the fall of 2000, a portion of employer and employee contributions to the state system will be diverted to individual accounts within the newly created Premium Pension Authority, known as the PPM. An initial influx of 34 billion kronor will kick off the new system. Future annual cash flows are estimated around 20 billion kronor for the first 10 years.
Individuals will have the choice of selecting money managers through the unitized system administered by the PPM, creating a potential bonanza for both domestic and foreign money managers.
The accounts of those who do not choose a manager will be handed to a newly created AP fund, which will pursue a low-risk investment strategy for those clients. However, new proposals also would permit individuals to select the new AP fund, and for those clients, the fund could take a more aggressive approach.