In a report made public on November 30, an independent committee within the Ministry of Finance recommended the merger of Sweden's pension buffer funds in order to take advantage of economies of scale and to improve returns. According to the report, these funds, with combined assets of 745 billion Swedish kronor (US$104 billion), could save an estimated 330 million kronor (US$46 million) and potentially boost returns by 700 million kronor (US$98 million) annually by consolidating their operations. A seven-member task force, led by Sweden's minister of social security, needs to agree to a review of fund administrative costs and fund performance before addressing the report's recommendations. Buffer funds in Sweden are intended to even out temporary fluctuations during periods when social insurance pension contributions are insufficient to cover pension disbursements. Under the current system of social insurance, four identical buffer funds were created to diversify risk management, increase competition to the system, ensure funds are not so large as to interfere with the operation of domestic financial markets, and reduce the risk from possible political influence on the governance of Swedish enterprises (whose shares would be held by buffer funds). According to the report, most of these arguments for operating several buffer investment funds rather than one large fund no longer exist. Specifically, the report notes that—

- Financial markets have developed in many ways during the past 10 years, with new financial instruments and the introduction of new investment strategies, so there is minimal risk that a merger of the funds would disturb the functioning of financial markets.

- Competition among buffer funds appears to have resulted in very similar portfolios, reflecting a herd mentality, which increases (not diversifies) the total risk in the system.

- Fund management performance does not appear to have improved as a result of competition; although there has been pressure to reduce costs in the system, the net results from active fund management (2001–2008) have been poor in all funds.

The report also suggests replacing current investment restrictions, including limits on private equity investments and a prohibition on commodity investing, with a more "prudent-person" approach (restricting portfolio investments to those a prudent person seeking reasonable income and preservation of capital might buy) to create conditions for more efficient fund management. In its review of issues affecting governance, the report recommends forming a parliamentary panel to oversee buffer funds similar to the way the central bank is run, allowing this new panel to select all board members and improving board member qualifications.

This article was extracted from the United States Social Security Administration publication International Update, January 2010.

Source: "Swedes Debate Merging Buffer Funds," citywire.co.uk, December 1, 2009; "Report Recommends Merging 4 Swedish Pension Funds," Pensions & Investments, December 7, 2009; "Sweden's AP Funds Should Be Merged—Report," ipe.com, December 7, 2009; "ESO Report on the Swedish Pension Fund System," Investor Services Journal, December 8, 2009; "Swedish Government Mulls Merger of AP Funds," Pensions & Investments, December 11, 2009; "Swedish Fund Merger Talks Heat Up," Pensions & Investments, December 14, 2009.

Publication date: 11.2009