FAQ

What is the Second AP Fund’s mission?

Answer:

The Second AP Fund manages part of the ’buffer capital’ within the Swedish National Pension System. Our mission is to maximize long-term return on the pension assets under our management. This ‘buffer’ creates a capital reserve that can be utilized in the form of disbursements when demographic trends in Sweden place exceptional pressure on the pension system. This means that the buffer funds’ primary long-term objective is to minimize consequences when the ‘brake’ (the automatic balancing mechanism) is applied to the national pension system, i.e. when balancing the deficit that can arise from the difference between pension contributions and disbursements. Over the long term, there will be times when buffer capital can be consolidated, as well as times when it must be drawn on..

What percentage of the Swedish National Pension System’s total capital assets is managed by the Second AP Fund?

Answer:

Together with the other ’buffer’ funds, the First to Fourth AP funds, we jointly account for about 10 percent of the pension system’s combined assets. About a quarter of these assets are managed by the Second AP Fund.
 In other words, approximately 90 percent of the pension system’s total assets is not exposed to the financial markets.

Why are there four ‘buffer’ funds (First to Fourth AP funds)?

Answer:

The present system was established in 2001. Its inception was preceded by many years of analysis by those with special expertise in the field. This resulted in the following conclusions:

1. There was a perceived need to spread the risks across several funds, rather than placing all the capital in a single fund.
   Looking back over the past eight years, it is clear that the return on assets achieved by the four funds differs. For example, if all the ’buffer fund’ capital had been managed by the fund that had posted the worst return over the period, the total ‘buffer’ capital would have been considerably less by now. This emphasizes the importance of spreading the risks.
2. Another important factor determined by the preparatory studies was the importance of ensuring that the funds should not be too large, given the need to retain flexibility on financial markets - it is easier to revise investment strategy when managing a small as opposed to large portfolio.
   This has proved relevant during the dramatic fluctuations noted by global capital markets in recent years when, among other factors, liquidity has been severely limited.
3. The analysis also indicated that competition between the four funds would make a favourable contribution to the joint return on assets.
   In spite of the constraints imposed by such investment regulations, the AP funds reveal a clear spread in the level of return generated over the years. A relaxation of these investment regulations would be a positive move and would probably contribute to a greater spread of risk.
4. A crucial aspect of their establishment was the understanding that State influence in these four funds would not be permitted to acquire a party-political dimension.
   The division into four funds served to limit the State’s influence. Today, the four funds act independently on the financial markets, contributing to public discussion on issues such as the environment, ethics and corporate governance.

What is the Second AP Fund’s goal?

Answer:

Our goal is an annual 5-percent increase in real return, which will enable us to fulfil our commitment to the pension system.

How does the Second AP Fund manage its capital assets?

Answer:

Portfolio spread is determined by our long-term investment strategy, based on the goal of an annual 5-percent return over time. Some 75 percent of total capital is managed in-house, by our own staff. The remaining capital is under external management at various financial centres around the world. About half of these capital assets are under active management. The rest is managed passively or semi-passively, against index.

What are the long-term return prospects?

Answer:

Over the past five-year period, the AP funds achieved an annual average nominal return of 3.4 percent. The AP funds have thus performed better than many much larger and better-known funds, such as Norska Statens Pensjonsfond (Norwegian State Pension Fund, the former Oil Fund) and CalPers, in the USA, as cited in McKinsey’s 2009 report. The AP funds have also performed better than the average performance noted by the PPM (Swedish Premium Pension Authority) since its establishment in 2001.

The nature of our mission makes us long-term investors. It therefore seems reasonable that buffer fund performance should be assessed over a period of more than eight years, especially in view of the fact that we have experienced two significant stock market collapses during the period. This is something pointed out in the Report on the AP funds for the period 2001-2008, submitted by Finansutskottet (the Government Committee on Finance) in November 2009.

 The average return posted by the Second AP Fund during the period 2001-2007 shows that we have succeeded in achieving our targeted return. Our average return for this period was 6.7 percent (McKinsey review, 2009). The stock market collapse of 2008 has had a highly negative impact on our operations, as it has on those of most other financial players. The market worth of the portfolio enjoyed a significant recovery in 2009..

How has the Fund performed this year?

Answer:

The Second AP Fund posted a return of 20.6 percent for the full year 2009, corresponding to SEK 34.9 billion, the best result since its start. Assets under management totalled SEK 204.3 billion as per December 31st 2009, an increase of SEK 31 billion compared with the preceding year.

How much does it cost to manage these assets?

Answer:

Management cost is dependent on the choice of asset class and investment strategy. This varies from one AP Fund to another and depends on how much of the assets are managed internally or externally, and to what extent they are under active or passive management.

How do the Second AP Fund’s costs compare with other pension funds?

Answer:

Since 2004, we have asked an external assessor, CEM, to compare us with other pension funds throughout the world. These comparative studies have demonstrated that our operations are cost efficient. As of 2006, the Second AP Fund’s costs have been well below the average reported for the reference group.

What might the likely consequences be, if you handed management of your portfolio of   Swedish equities to external funds?

Answer:

The Second AP Fund currently conducts the management of most of its portfolio of Swedish equities in-house. If we were to outsource the management of our Swedish portfolio, it would cost more. Furthermore, this would mean that corporate governance issues in our portfolio companies would then be handled by external fund managers, reducing our influence over such issues. This would be both illogical and unfortunate, given the nature of the AP funds’ brief, which includes a commitment to ethical and environmental issues. For the business community in general, it is important that we have involved and committed stakeholders.

In what areas do the AP funds collaborate?

Answer:

The AP funds currently collaborate in a number of areas that offer clear benefits and which are not in conflict with our mandate. Examples include the Ethical Council, tax issues and the procurement of external services. We analyse and monitor areas of collaboration on an ongoing basis. We are currently engaged in a joint review of our costs for custodial banking and information systems.

How do you react when the Fund is rated by institutions, expert commentators and the media?

Answer:

It is good that the system is subject to continual monitoring and assessment. We ourselves ensure that our activities are assessed by independent parties on an ongoing basis. In the case of the Second AP Fund, this has led to greater efficiency and reduced costs.

What are the benefits of the current ‘buffer fund’ structure?

Answer:

The present system offers two especially significant benefits. First, the four funds ensure a good risk spread. The existence of several independent funds, free to make their own decisions, reduces the overall level of risk in the system. The present structure also serves to limit the concentration of power on the Swedish capital market, enabling the exercise of responsible governance by each fund.