New research investigates the systemic impacts of the large and growing superannuation industry in Australia highlighting two main concerns, that may differ from what you expect, and drawing conclusions for other evolving defined contributions systems. 

The Conexus Institute recently released a report titled Systemic impacts of ‘big super’. The full 85-page report can be found here, and shorter summary version here. The research investigates the implications for the broader Australian economy, financial markets and population of what has become a large superannuation (i.e. pension) system containing some very large funds.  

As at September 2024, assets in the Australian super industry stood at A$4.1t ($2.8 trillion), 150 per cent of GDP. The biggest fund (AustralianSuper) had A$355 ($246) billion in assets. The Australian system is also substantially (around 90 per cent) defined contribution (DC). In fact, it is the second largest DC system in the world behind the US (see table). 

Our broad-ranging report considered the benefits, risks and issues arising from big super. The overall conclusion is that Australia’s super system is a boon. It has facilitated the creation of a large pot of retirement savings that is being professionally managed, and brings benefits related to improved stewardship of capital and broadening out of available funding sources in the economy.   

We highlight two main concerns that may differ from you expect. The first is that super exposes members to economic and market risk, with a 70/30 growth/defensive mix being typical. While we consider this entirely appropriate as it boosts expected retirement outcomes, it is not without risk. Growth assets are likely, but not guaranteed, to deliver over the long run. Second, the operational infrastructure of the industry (administration, etc) appears underdeveloped. This is causing issues in areas like member servicing, and will require considerable effort, cost and time to upgrade. It also leaves the maturing system underprepared to develop and deliver a more personal tailoring in the retirement phase. 

Our report considers a variety of other issues, including the implications of significant FX exposure, service supplier concentration, vulnerability to scams, effects arising from herding of investment behaviour, super proving an unreliable source of funding for a sector, prospect of loss of confidence and trust, and effects arising from increasing fund size for governance, management, culture and ability to exert influence. We see scope for a range of impacts, but conclude it unlikely that any of these impacts reach the hurdle of ‘systemic’ in nature.  

We also consider whether super could be a source or magnifier of systemic stress in the Australian economy and/or financial system, including the potential for a system-wide liquidity squeeze or a run on a major fund. We argue that super is an unlikely source of systemic stress, and could either be a magnifier or dampener of stresses that emerge from other sources.  

Here we stand somewhat at odds with commentators – including the IMF – which has expressed concerns over exposure to liquidity risk in a DC system offering redemption-at-call while carrying investments in illiquid assets and currency hedges (which can give rise to margin calls).  In the remainder of this article, we unpack why we have much less elevated concerns over the issue, and reflect on the implications for pension system design.     

Our limited concern relates to the settings of the Australian system and how super funds have set their portfolios. First, in a DC pension system the members bear the risk. Super funds are also not permitted to leverage. There are no guarantees to force selling in response to poor market returns.  

Second, the experience is that the vast majority of members have remained inactive – even in the face of developments such as the Global Financial Crisis of 2008-9 (“GFC”) or COVID. The assets are preserved in the super system until retirement, prior to which members are only able to switch funds and investment options. Meanwhile, the system as a whole is in inflow, and is projected to remain so for around another decade. This greatly reduces the potential for significant outflows from the system overall, although the possibility of outflows from particular funds remains. 

Third, very few super funds hold more than 30 per cent in illiquid assets while currency hedges are about 16 per cent of assets for large super funds, which significantly limits the potential for a liquidity crisis. Consider what would happen if a fund with 30 per cent illiquid assets suffered an outflow of (say) 10 per cent of assets under management. The initial response would be to sell their liquid assets, resulting in the illiquid assets moving from 30 per cent to one-third (i.e. 30/90) weight. The result would be a modestly out-of-shape portfolio, while individual funds are not significant enough to disrupt markets. So no big issue. We run analysis that combines high illiquid asset exposure and currency hedges with fund outflows and market declines, and find it hard to build a plausible scenario that ends in disaster.  

Nevertheless, members of a fund in outflows may suffer some losses as a consequence of their fund being a forced seller of assets, and needing to tidy up an untidy portfolio in the fullness of time. But this is hardly a systemic event. Further, from a system perspective, those on the other side of the trades will benefit. 

Fourth, institutional settings provide further protection. The regulator requires funds to have detailed liquidity management processes and plans in place. If worse comes to worse, the regulator can suspend the requirement that a fund meets redemptions. And we feel confident that the authorities would take whatever action is needed if liquidity pressures in super amounted to a systemic threat.  

In sum, there are lots of gates to go through before super causes a liquidity event of systemic importance. Not impossible, but highly unlikely.            

How might super funds behave in an economic and market crisis? On one hand, they could magnify the stress by joining a pile-on to sell assets or withdrawing capital from some sectors. On the other hand, rebalancing activities and the opportunity to pick up cheap assets may encourage them to step up to the plate and provide funding where it is most needed. Indeed, this is how super behaved during the GFC. How members react to the crisis (i.e. switching activity) may also have effects. Whether super acts as a magnifier or dampener of system stress will depend on how the situation unfolds.    

The main message is that the specifics of both the pension system and the circumstances are important. In DC systems, the members bear the risk. Here pension funds act as a conduit to distribute the effects of systemic stress around the economy. Whether pension funds themselves exacerbate the situation depends on the system settings. In the Australian system, risks are limited by the fact that it is a partly closed system (at least in accumulation) in inflow with mainly inactive members, no leverage, exposure to illiquidity and derivatives being kept to manageable levels, and regulatory settings that help to keep everything in check. These features need not apply in other DC systems.  

In DB pension systems, the liabilities are typically well-defined undertakings with the sponsor bearing the risk. Dynamics such as the management of mark-to-market funding ratios and use of derivatives to manage exposures can be at play. The ‘crisis’ in the UK system during 2022 is a salutary example or how these features can have systemic implications. Leverage may also be used, which is a feature in the Canadian system. Political considerations may also loom large, with US public pension plans being a case in point. In some systems, the assets are concentrated within one major fund, e.g. Korea, Norway and Singapore.  

The bottom line is that the specific settings of a pension system matter for its potential to have systemic impacts that extend across the economy or markets. The key issues will differ from country to country. We see the Australia’s DC super system as overall beneficial and an unlikely propagator of system stress. We trust that its features may provide some useful lessons for other systems. 

*David Bell is executive director, and Geoff Warren is research fellow at The Conexus Institute, an independent think-tank philanthropically funded by Conexus Financial, publisher of Top1000funds.com 

Abu Dhabi-based sovereign wealth fund ADQ kicked off the new year forging two global investment partnerships, as the fund seeks to boost its influence in emerging markets by deploying capital in critical areas such as infrastructure and urban development.

The Gulf investor said on 12 February that it has signed a Memorandum of Understanding (MoU) with International Finance Corporation, the World Bank’s private finance unit, to explore co-investment opportunities in sectors such as agriculture and healthcare infrastructure in developing countries.

It came less than a week after it signed a separate MoU with Vietnam’s government-owned sovereign investor, State Capital Investment Corporation (SCIC), to together identify and invest in areas critical for Vietnam’s economic development.

ADQ was known as Abu Dhabi Developmental Holding Company (ADDH) when it was established in 2018 but rebranded to its current name in 2020. Consultancy, Global SWFs, estimates it has $249 billion in assets under management.

While it is a relatively young sovereign investor, it has had an outsized impact particularly in emerging market countries. It invested $35 billion in Egypt last February and acquired the rights to develop a prime coastal area, Ras El-Hekma. The Egyptian prime minister Mostafa Madbouli hailed it as the biggest foreign direct investment in the nation’s history.

The deal helped alleviate the foreign reserves crisis Egypt has been in since 2023 and paved the way for the nation to eventually secure a bigger $8 billion loan program from the International Monetary Fund in March 2024.

Elsewhere, ADQ also offered to shore up the Turkish economy, providing up to $8.5 billion of earthquake relief financing bonds after southern and central Turkey was struck by catastrophes in February 2023, as well as a $3 billion credit export facility for Turkish companies.

ADQ’s deal with SCIC this week marks its first partnership with a Southeast Asian state government entity, although it has already been a prolific venture capital investor in the region. It created an externally managed venture program in 2020, which aims to invest in Indian and Southeast Asian startups and attract them to set up shops in Abu Dhabi.

Trade between the United Arab Emirates and Vietnam reached $4.7 billion in 2023 and almost $4.5 billion in the first eight months of 2024, representing a 45 per cent surge year on year. Mohamed Hassan Alsuwaidi, ADQ managing director and group CEO said the deal with SCIC will strengthen bilateral ties.

New capital flows

According to a summary of a December board meeting last year, chair of ADQ Sheikh Tahnoon bin Zayed Al Nahyan – who also oversees Abu Dhabi Investment Authority and is the deputy ruler of Abu Dhabi – “emphasised ADQ’s pivotal role as a catalyst for Abu Dhabi’s economic growth and the expansion of international investment opportunities”.

ADQ currently has over 25 portfolio companies and operations across more than 130 countries. They are categorised into what the fund calls “economic clusters”, including priority sectors (energy and utilities; food and agriculture; healthcare and life sciences; and mobility and logistics) and emerging sectors (financial services; tourism, entertainment and real estate; and sustainable manufacturing).

The so-called growth market capital is experiencing an incredible boom, evidenced by the fact that nearly all new SWFs came from nations between the G7 and the more frontier markets, ADQ said in a research paper last December. ADQ itself is one of them.

But the important change is these investors are no longer satisfied with just the strategy of buying safe assets like US Treasury bonds which during periods of low interest rates yielded sub-optimal returns.

The fund sees itself as operating in a “polycentric world”, characterised by the fact that global capital flows are coming from and being directed to an increasingly diverse set of destinations.

“… capital from growth markets, which once went into government securities in developed markets, is now being directed toward investments much closer to home,” the paper said. “This use of development capital creates growth opportunities in those markets which in turn attracts global capital – whether it is portfolio flows or FDI flows.”

ADQ encouraged growth markets to further standardise their market and economic operations, such as by implementing a flexible exchange rate system, demonstrating trade openness and more closely monitoring investor sentiment.

“At the end of the day, capital flows to where it is treated well,” the paper said.

The muted IPO market has created a backlog of companies looking to make their public debut. In the current climate, a strategic and meaningful exit option for founders and CEOs can be M&A, so argue executives from Ontario Teachers’ Pension Plan’s venture capital allocation.

In a bid to support portfolio companies in Teachers’ Venture Growth (TGV) allocation the pension fund convened a discussion led by TVG’s John-Christian Bourque, Shannon Bailey and Yvonne Wassenaar to discuss how founders and CEOs can optimise their exit. Their key advise focused on building optionality early, establishing strategic relationships, and managing a successful sale process.

The 45-person team in TVG’s allocation manages around $7.5 billion. Initial direct investment range from $50-$250 million focused on late-stage venture and growth equity investments in cutting-edge technology companies. Recent investments include Fleet Space Technologies, Australia’s leading space exploration company, and Mintifi, India’s leading supply chain financing platform. Strategy is shaped beyond simply investing to partner with portfolio companies to create opportunities and achieve the best outcome together.

The trio discussed the importance of founders building optionality early.

“Creating optionality should start as your business nears $25 million ARR, not when challenges arise. Building optionality involves making your business adaptable and building trusted industry relationships to avoid a pressured sale down the road,” they said.

They also sounded the importance of start-ups investing in strategic relationships. Founders often hesitate to connect with bankers and private equity firms unless they have immediate plans for a sale. However, establishing these relationships early provides insights into market trends and better positions a business for an eventual exit.

Founders should also broaden their viewpoint.

“Understand how others view your industry and where they see value in your company’s approach. Engaging bankers can help you understand the valuation landscape, even if you’re not immediately considering a sale,” they said.

Allow ample time for the process

A successful sale takes time.  Preparing for this empowers entrepreneurs to manage expectations, ensure needed runway and avoid weakened negotiation positions.  This is critical given the challenging fund-raising market and regulatory environment.

They advised founders on the importance of scenario planning and developing potential exit scenarios. Always consider the opportunity cost of your decisions. Time is incredibly valuable, and cash is no longer free, they said, advising that founders understand the different pay outs to key shareholders at different valuation points.

Next the venture team advised firms on the importance of strategically engaging their team. This comprises minimizing the number of people who are involved in any process to avoid leaks and distraction. They advised on the importance of helping those involved understand the sale phases and guide them in balancing the process with running the business. If you might need to exit at a depressed valuation, consider a management carveout plan to ensure retention of essential executives through deal close.

Set the table for success

They said to remember that a deal is not done until the money is in the bank.  Sales processes can be exhausting and easily tilted by seemingly minor issues, such as cultural fit. Moreover, merger agreements tend to be long and incredibly nuanced.  “Work to proactively manage cultural fit and augment your team with experienced outside advisors,” they said, listing key areas to think about.

The importance of culture alignment: Leaders prioritize cultural fit when buying companies.  Identify and clearly highlight your company’s cultural strengths. Aligned values will strengthen the deal’s viability and support post-close success.

Surround yourself with experienced advisors: There is a lot to be negotiated in a sale process beyond price.  Potential acquirers likely will have more experience than you on how to tilt terms and definitions to their advantage.  Be sure you have experienced advisors to help you strengthen your negotiations and avoid unexpected surprises.

Every founder aims to leave a lasting impact on their industry and create meaningful value for their team and investors. Leaders who actively manage the factors within their control achieve the best outcomes.

The growing threat of cyberattacks at portfolio companies – from the growth in AI, IT skill shortages and geopolitics – is viewed as a key risk at the £34 billion Railpen. The investor outlines how other asset owners and managers can engage on the issue.

Railpen, the £34 billion fund for the members of the UK railways pension schemes, is urging fellow investors to recognise the financial materiality of cybersecurity in their portfolios.

Together with Royal London Asset Management, Railpen has laid out how investors can ensure best practice among portfolio companies, identify and engage on cybersecurity and participate in policy advocacy to help build a supportive regulatory environment. The report, Cyber Security Risk and Resilience, follows on from 2019 when Railpen joining forces with the UK’s largest defined contribution fund, Nest, to produce a joint report on cyber and data security.

“We are seeing a concerning disconnect between leaders’ awareness and preparedness for cyber attacks,” says Sophie Harris, senior investment analyst, sustainable ownership at Railpen.

“We believe investors have an important role to play when it comes to closing the gap and forcing business to start taking cyber preparedness more seriously. Recognising the importance of cybersecurity resilience, we encourage asset managers to develop their understanding of the financial materiality of cybersecurity, use the investor expectations as a tool for engagement with companies that face a high level of risk, and report on progress to their clients.”

How big is the risk?

Cyber risk sits in supply chains and with third parties. The growth in AI, IT skills shortages and geopolitics have also spiked cyber risk in recent years.

“Contagion risk in supply chains can be evaluated through third-party management strategies. Additionally, a company’s employee training programmes and incident response plans can provide insight into its preparedness for AI generated risks,” say the authors.

According to the IMF, cyber incidents with malicious intent have almost doubled since Covid. Meanwhile, the World Economic Forum 2024 Outlook reported that 29 per cent of organisations stated that they had been materially affected by a cyber incident in the past 12 months. Cyberattacks have also become more costly, as the risk of extreme losses has increased, sometimes putting firms at risk of insolvency. Global cybercrime costs are expected to surge to £8.2 trillion by the end of 2025 but the actual extent of the damage is likely to be much higher as many attacks go undetected or unreported.

The report cites figures that put the average loss associated with a data breach and the recovery process at US$4.88 million. In another trend, cybersecurity risk is increasingly being transferred to insurers. An estimated US$12 billion of gross premiums were written in 2023. But insurance doesn’t cover all the risks. Companies share price falls, they face elevated costs of debt and increased audit fees and the threat of regulatory action too.

“The increasing number, cost, and threat drivers of cybersecurity incidents, coupled with a disconnect between awareness of, spending on and preparedness for this risk at a company level, is leading to growing cybersecurity risk across portfolios. We believe cybersecurity needs more attention, particularly due to its systemic implications, and we invite investors to take action,” states the report.

What are the engagement priorities?

Corporates need robust board oversight of cybersecurity practices. Investors need to ensure the boards at portfolio companies are actively involved in cybersecurity governance, helping to set the right tone at the top and aligning cybersecurity strategies with business objectives.

It’s an area pension funds like Nest are keenly focused, explains Diandra Soobiah, director of responsible investment and a member of the UK’s Cybersecurity Coalition set up in 2019 to address the systemic risk posed by cyber security alongside Brunel Pension Partnership, Border to Coast and USS.

“We expect corporate boards to be adequately prepared for cyberattacks with operational resilience at the heart of a cybersecurity strategy. We will use the guidance to enhance our engagements with companies to help protect our 13 million members from this systemic risk,” she says.

Comprehensive due diligence and proactive risk management of external parties are critical. This includes assessing the cybersecurity posture of suppliers and acquisition targets to mitigate risks and ensure the integrity of the supply chain.

Fostering a resilient culture is fundamental and should be supported by strong vulnerability management and penetration testing; obtaining relevant cybersecurity certifications ensures that daily operations are secure and reduces the risk of cyber incidents.

The report also stresses the importance of working with peers and government bodies to enhance cybersecurity standards. “Collaborative efforts can lead to the sharing of best practices, threat intelligence, and coordinated responses to cyber threats,” it states.

Other key areas where investor engagement can reap dividends includes timely disclosure of cybersecurity breaches and the inclusion of information security and cyber resilience in executive compensation KPIs. The authors suggest corporates introduce cyber covenants in supplier contracts and develop innovative and tailored training programs across the workforce.

“We encourage investors to use the expectations outlined in this report to assess companies’ baseline approach to cybersecurity and to measure companies’ progress towards best practice,” write the authors.

Investors should focus their efforts on identifying and engaging with companies that face high-risk exposure. Identifying the laggards in vulnerable sectors (healthcare, manufacturing, finance and utilities, to name a few) can enable investors to proactively engage with companies.

Investors should also be prepared to escalate. When a company fails to respond to questions on cybersecurity or is deemed to fall far below investor expectations on best practice, escalation can be a useful tool to secure a response or encourage change

Actively engaging in public policy advocacy regarding cybersecurity, including responding to consultations such as those from the SEC on cyber reporting is another approach. By undertaking public policy advocacy, investors can help shape the regulatory landscape to support positive cybersecurity outcomes and ensure that the standards set by bodies like the SEC are practical, effective, and aligned with the realities of the market.

“Cyber incidents will continue, with increasing frequency and sophistication. Investors can only protect value by understanding the risk factors, governance and strategy, and by knowing what questions to ask. This collaborative engagement has built on our understanding and provided valuable insights on set expectations,” concludes Faith Ward, chief responsible investment officer, Brunel Pension Partnership.

Just days after Alberta Investment Management Corporation’s New York office celebrated its first anniversary it has been shut down entirely, along with the Singaporean office, for cost-saving reasons. 

It’s a further sign of the ongoing upheaval at the C$169 billion ($119 billion) Canadian pension manager since a scathing political review last year led to a purge of its leadership team.  

AIMCo started doing business from a Singapore office in September 2023 and opened its New York unit six months later. It held ribbon-cutting ceremonies for both, and the Singapore office touted high-profile hire Kevin Bong, who jumped ship from Singaporean sovereign wealth fund GIC. 

The move to close both short-lived branches has led to the departure of at least Bong, chief investment strategist at AIMCo; and of David Scudellari, global head of private assets, who opened the NYC office. 

An AIMCo spokesperson told Top1000funds.com that the decision was a “strategic realignment of resources”. When asked if further overseas office closures are on the cards the spokesperson did not directly respond. 

“We remain committed to pursuing investment opportunities in the APAC region and globally, leveraging our extensive network of partners and our existing offices to provide continued value to our clients,” the spokesperson said.  

The bulk of AIMCo’s assets are invested in North America, with 42 per cent in Canada and 33 per cent in the US. Asia represents just 3.2 per cent of the asset allocation. 

The move came after AIMCo made 19 non-investment related positions redundant last month, which included its diversity and inclusion program lead. 

Not out-of-whack 

Despite the scrutiny it receives on costs, AIMCo’s expenses are not out of line with its peers. It is worth noting that AIMCo is a Crown corporation and investment manager for several public pension plans, and those operating under similar arrangements include giants such as the C$434 billion CDPQ, the C$229 billion British Columbia Investment Management Corporation (BCI) and the smaller C$77 billion Investment Management Corporation of Ontario (IMCO). 

In the 2023 fiscal year, AIMCo’s total costs per C$100 of AUM were 66.4 cents, compared to CDPQ’s 59 cents, BIC’s 80.4 cents and IMCO’s 80.6 cents, according to their respective annual financial statements. 

AIMCo’s latest annual report shows that total costs for the fiscal year ended 31 March 2024 were C$1.08 billion, compared to C$993 million in the previous year. The jump was primarily attributed to expenses related to a business transformation program – a multi-year initiative that chief financial officer Paul Langill last October told an Alberta Senate committee began in April 2023. 

“We are buying an integrated investment platform, and we’re building a modern data platform,” Langill said. “The total program cost is estimated at about (C)$130 million over a four-year period.” 

Other elements that lifted total operating costs included higher headcount, more assets under management and higher performance fees. The fund had at least 600 employees working in global offices at this time. 

Pressure to invest locally 

The closure of AIMCo’s overseas offices comes at a time when the Alberta government is attempting to mobilise more assets to invest locally. The province’s premier Danielle Smith last month unveiled a plan to grow the Alberta Heritage Fund, currently managed by AIMCo, to C$250 billion by 2050.  

The fund was established in 1976 to invest a portion of the province’s resources revenue. Its primary goal will be to support technology, energy and infrastructure investment in Alberta. 

The government simultaneously established a “sovereign-wealth style” agency, Heritage Fund Opportunities Corporation (HFOC) which will give directions to AIMCo on how to manage the existing C$24 billion assets of the Heritage Funds, but will itself invest the additional C$2 billion seed capital from the government in fiscal 2024. 

As the HFOC’s investment model is proven, more assets could be moved from AIMCo, the government said. Canadian press reported that discussions on how to grow the Heritage Fund’s returns were held between Smith and AIMCo before the latter’s entire board was ousted in November. 

At the Top1000funds.com Fiduciary Investors Symposium last year, industry luminaries who helped shape the contemporary “Canadian model” warned that it is under threat today from an increasing politicisation of the pension sector.  

Mark Wiseman, who served three years as AIMCo chair before stepping down in 2023, told delegates: “When you see trillions of dollars in assets, when you see a government that is running deficits, when you see economic malaise – and we’ve seen this in other jurisdictions – this is the time when pension assets get raided. And I’ll use that term, because that is the risk that I think the Canadian model faces today.”  

AIMCo’s recent woes began last November when Alberta’s Minister of Finance Nate Horner lashed out at the ballooning costs of running the fund. Horner said in a statement that AIMCo’s third-party management fees had increased by 96 per cent, the number of employees by 29 per cent, and staff wages by 71 per cent between 2019 and 2023, all while the fund managed less money.  

In an unprecedented decision, Horner sacked the entire AIMCo 10-person board and then-chief executive Evan Siddall. The board has since been replenished with five members and is now chaired by former conservative Canadian prime minister Stephen Harper. Ray Gilmour has been acting chief executive since November last year, but a permanent chief executive is yet to be installed. 

Much anticipated reform of Sweden’s five buffer funds will liquidate AP1, dividing assets between AP3 and AP4. Private equity specialist AP6 will also merge with AP2, expanding the opportunity for the private equity investor and securing the future of the specialist team.

Katarina Staaf, chief executive of SEK 75 billion ($6.8 billion) Sixth Swedish National Pension Fund, AP6, says the recent reform process that has reduced the country’s five buffer funds to three has expanded the opportunity for the private equity specialist.

Under the reforms, AP6 will finally be integrated into the wider buffer system by merging with the Second Swedish National Pension Fund (AP2) forming a new entity in Gothenburg (where both funds are already domiciled) that will be given increased opportunities to invest in unlisted assets in accordance with AP6’s existing expertise. The reform process took account to two “very important” aspects that AP6 put forward in its consultation response, explained Staaf.

“As the proposal previously looked, there was a risk that the share of unlisted shares in the buffer fund system would decrease, as well as that the expertise acquired by AP6 was not fully utilised. The pension group has supported a proposal in which they want to give room to utilise accumulated expertise by AP6 and where the merged fund is given expanded opportunities to invest in unlisted assets up to and including 2036,” said Staaf.

AP6 was founded in 1996 and has generated a positive net profit every year for the past decade. The portfolio had a 3 per cent net return in 2023 and a 15.3 per cent return over the last 5 years.  Assets are divided between buyout (44 per cent) buyout co investments (38 per cent) and venture/growth (14 per cent) secondary opportunities (4 per cent).

Most investments sit in IT and healthcare and the portfolio has gradually internationalised over time so that today around 31 per cent is invested in the US. Co-investment partners include EQT, Nordic Capital, Permira and Carlyle.

The consultation process flagged that integration of AP6 could be facilitated by removing the legal requirement of currency hedges, allowing inflows and outflows linked to the pension system and by enabling AP6 to borrow from The Swedish National Debt Office (Riksgälden).

But Staaf declined to speculate on next steps. Implementation and reorganisation will be overseen by two special investigators targeting completion in January 2026. A bill will be presented for a vote in the Riksdag during the second quarter.

“Only after this is it possible to have an idea of ​​the way forward,” she said.

Policymakers have committed to private equity. But a drive to create economies of scale, reduce costs and tighten governance, AP1, the SEK 476 billion ($43 billion) buffer fund will be  liquidated and its assets transferred equally to AP3 and AP4.

“We will prepare for the change and will contribute with our expertise and experience for the benefit of the pension system and affected organizations,” said chief executive Kristen Magnusson Bernard in a statement.

Chief executive of AP4 Niklas Ekvall says his focus is now on implementation.

“The government and the pension group, with representation from all parties, have now communicated their view of changes to the buffer fund system. It is now our task to implement their decisions in the best possible way for the pension system,” he said.

“It is good and natural to regularly review the pension system and buffer funds to ensure that it lives up to its objectives and to ensure confidence in the pension system among the Swedish people. The AP Funds were involved in the investigation that was carried out and we were given the opportunity to comment via our consultation responses.”

Ekvall also stressed the strength of the funds.

“The starting point for consolidation is to manage the fund capital in the best possible way in the future. The AP funds are proud to have delivered high returns that have helped to strengthen the pension system. The AP funds have built up competent and professional organisations with a strong culture and investment processes. The good returns, cost-effectiveness and our sustainability work are at the forefront of international comparisons.”

Elsewhere, the reforms have tightened the statutory competence requirement for board membership. They have also adjusted the investment cap for Swedish-listed companies.

AP3 and AP4 (the two remaining Stockholm-based funds) will now be able to hold up to 3 per cent of total market capitalisation, up from 2 per cent though voting rights remain capped at 10 per cent.