STOCKHOLM, Sweden -- The Swedish Ministry of Finance has proposed making asset-liability modeling mandatory for AP Fonden, the 744 billion Swedish kronor ($89.2 billion) state pension system.
Three of the six funds that comprise the Allmanna Pensionsfonden system already are putting together an asset-liability study in anticipation of the government's moves to encourage the funds to focus on asset-liability management, said Bo Ljunglof, deputy managing director and business director for the AP funds 1-3.
Observers expect the AP funds to increase their allocations to equities. At this stage, AP funds 1-3, which total 627.8 billion kroner, are restricted to investing almost 95% of the assets in fixed income -- mostly Swedish government bonds -- with the balance invested in real estate.
Requiring the AP funds to use asset-liability management is a possibility included in the ministry's proposals, published in June, covering a reorganization of the funds and outlining new investment rules. The reorganization is designed to increase returns on the pension capital while limiting risks by allowing asset diversification.
The asset-liability management proposal will have no impact on the country's growing private pensions industry, said Magnus Petrelius, economist at the Swedish Ministry of Finance. But because AP Fonden is the country's largest pension system, it is likely private funds will follow the AP example, local sources said.
Few Swedish pension funds use asset-liability management strategies in calculating the costs of future liabilities. Instead, the pension plans -- with assets totaling 1.8 trillion kroner -- tend to be unfunded and financed through book reserves, local consultants said.
Come January 2001, when their restructuring is complete and the AP funds are free to invest in all asset classes, asset-liability modeling will be vital, said Mr. Ljunglof. He would not say what impact the study would have on the asset allocation for AP Funds 1-3, but there undoubtedly will be a move to sharply reduce the exposure to fixed income.
The restructuring proposals, including the recommendation on enforcing asset-liability management, have been circulated to around 40 organizations active in Sweden's investment industry that have until late this month to comment.
The proposals are likely to go before the Swedish Parliament as a bill that will be discussed early next year.
The Ministry of Finance is circulating the proposals to the investment industry to measure its response, and mandatory asset-liability management might become a "concrete proposal" in the bill, said Mr. Petrelius.
"It should be mandatory for all funds that have pensions liabilities to use ALM," said Annelie Enquist, head of investment consulting in Sweden for William M. Mercer AB, Stockholm. For the past two years Mercer has been lobbying the Swedish Ministry of Finance to make asset-liability management mandatory for the AP funds.
Many private funds are starting to show an interest in asset-liability management, local consultants said.
"Making ALM mandatory will force a more rigorous approach to the setting of investment strategy, but that is a trend I expect to develop of its own accord," said Eric Steedman, principal at Watson Wyatt AB in Stockholm.
Swedish pulp and paper group Svenska Cellulosa Aktiebolaget, Stockholm, was one of Sweden's first
companies to run an asset-liability study. Its proposals for its 1 billion kronor pension fund were "largely adopted" at the beginning of the year, said Richard Barker, director of compensation and benefits.
The fund has 750 million kronor in domestic and international equities, with the balance in international and domestic government bonds.
The 6.5 billion kronor Volvo Pension Fund, Goteborg, plans to run an asset-liability study next year, said Eddie Dahlberg, managing director.