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ICPM Discussion Forum Toronto June 3-4, 2008

ICPM Discussion Forum Toronto June 3-4, 2008. Background to pension reform. Reform driven by demographics. From DB to NDC in 1999. Autonomous pension system. Future pensions depends on financial stability. Pre-retirement longevity risk transferred to retirees.

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ICPM Discussion Forum Toronto June 3-4, 2008

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  1. ICPM Discussion ForumTorontoJune 3-4, 2008

  2. Background to pension reform • Reform driven by demographics. • From DB to NDC in 1999. • Autonomous pension system. • Future pensions depends on financial stability. • Pre-retirement longevity risk transferred to retirees. • Pensions based on lifelong incomes. • Pensions indexed by average wage growth. • Reformed system aims at better incentive structure.

  3. National budget 16 % 2,5 % National Debt Office PPM AP 1-4 AP 7 / Private Funds (>600) Guarantee pension Pension System at a glance Pension charge, 18,5 % of capped income Premium pension DC Income based pension NDC

  4. Background to AP2 • AP2 is one of four ”buffer funds”. • New role since 2001. • USD 37 bn in AUM. • Accumulated net inflows since the early 60’s. • Net inflow projected to 2010. • Makes up ~ 12 % of pension system assets. • Relatively few binding investment restrictions.

  5. Governance structure • Every separate AP fund a Government Agency. • Independent Board hires (and fires) CEO. • Board decides on Investment Policy. • Investment professionals in charge of ALM, implementation and active risk budget. • Annual assessment of AP-funds by MoF reported to Parliament.

  6. Restrictions • Prudent persons principle advocated by AP-funds and MoF consultant. • Quantitative restrictions few but in use. • Better aligned compensation system advocated by MoF consultant. • Risk/return considerations have supreme priority. • Economic and Industrial Policy objectives explicitly banned.

  7. Quantitative restrictions (1) • At least 30 % of AUM in Fixed Income instruments ”with low credit- and liquidity risk”. • Government bonds and Investment Grade Corporate Bonds. • Payment alertness. • Binding restriction

  8. Quantitative restrictions (2) • A maximum of 5 % of AUM in Non-listed Assets, Real Estate excluded. • Only Funds or Fund in Funds permitted. • Relates to Private Equity and Infrastructure. • Payment alertness. • Transparent performance attribution. • AP6 invest exclusively in (Swedish) Private Equity. • Binding restriction

  9. Quantitative restrictions (3) • A maximum of 40 % of AUM exposed to currency risk. • Above 40 %, global exposures must be hedged. • SEK-denominated liabilities. • Swedish equities typically exposed to currency risk. • 40 % considered to be “generous”. • Not a binding restriction.

  10. Quantitative restrictions (4) • Investments in Commodities not allowed. • Not considered as a “conservative investment”. • Typically not part of “traditional” institutional investor portfolios. • Binding restriction with negative diversification implications.

  11. Quantitative restrictions (5) • A maximum of 10 % of AUM exposed to single counterparty or group of counterparties. • Governments exempted. • Risk concentration and low diversification. • Low liquidity. • Not binding.

  12. Quantitative restrictions (6) • Market value of Swedish public equity may not exceed 2 % of total market cap. • Combined, the AP-funds can not own more than 8 % of the Swedish market. • Restriction on influence in Swedish companies. • Low risk, diversification, market impact and payment alertness. • Not binding.

  13. Quantitative restrictions (7) • A maximum of 10 % of voting rights in one single company. • Restriction on influence in Swedish companies. • Clarifies the overriding objectives with the AP-funds. • Low risk and diversification • Not binding.

  14. Quantitative restrictions (8) • A minimum of 10 % of AUM must be managed by external managers. • Underlines importance of cost efficient management. • Not binding.

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