The Swedish government’s plans to streamline the country’s pension system and merge private equity-focused buffer fund SEK 77.1 billion ($8 billion) AP6 with its larger, diversified sibling SEK 458 billion ($48 billion) AP2, has hit a bump in the road.

In the latest to-ing and fro-ing, AP2 has defended the government’s recent proposal to sell off the majority of AP6’s private equity portfolio but the strategy has – predictably – drawn fierce criticism from AP6, warning that it could knock billions off returns over time.

The policy document proposes that around SEK 47.5 billion ($4.9 billion) of AP6’s private equity funds and co-investment assets go into a transition portfolio that will be sold off gradually over time and re-invested in low-risk investments. It means only around 40 per cent of its portfolio will be combined into AP2’s long-term private equity allocation.

In a particular point of contention, the report suggests AP6’s SEK 24.3 billion ($2.5 billion) allocation to 85 co-investments with 25 managers also goes into the transition portfolio – a strategy AP6 chief executive Katarina Staaf has predicted could contribute to losses of as much as SEK 70 billion ($7 billion) in returns over the next decade.

“Placing more than half of AP6’s assets in the transition portfolio means much of the expertise on private equity that AP6 has built up over almost three decades will no longer benefit the Swedish pension system. A recent successful example of our co-investment program was the medical technology company Asker Healthcare. AP6 sold its holdings in the company a couple of weeks ago at a profit of more than SEK 4 billion ($0.42 billion),” said Ulf Lind Lindqvist, head of communications at AP6.

But Eva Halvarsson, CEO of AP2, tells Top1000funds.com she doesn’t want to increase AP2’s allocation to private equity beyond 15 per cent, and co-investment is unlikely to increase returns. She argues AP6’s estimated losses don’t consider AP2’s mission to manage a diversified portfolio, or take into account the high-risk nature of the asset class.

“In our view, the analysis put forward by AP6 is based on several misinterpretations,” she reflects. “It does not consider the fundamental prerequisite that AP2 has an unchanged mission as a diversified pension fund, nor does it take risk into account. Private equity investments offer high expected returns but also entail higher risk compared to many other asset classes. AP2’s mission is to manage the Swedish people’s pension capital responsibly, with consideration for both return and risk.”

She adds that AP2 has only just conducted a comprehensive ALM analysis, which concluded that a strategic allocation of 15 per cent to private equity is appropriate.

“This is a high proportion compared to other pension funds globally and a higher allocation would improve expected returns slightly but would also significantly increase risk, thereby reducing the risk-adjusted return.”

Halvarsson also questions the value of co-investments.

“Co-investments demand substantial resources and contribute to heightened portfolio risk. For perspective, AP2 has achieved comparable returns in private equity, without co-investments.”

She says AP2 will manage the transition portfolio with the same “diligence, professionalism and care as its existing private equity portfolio” and the focus will be on “creating value and generating liquidity over time, without accelerating divestments”. She reflects on the “valuable work” AP6 has done building the portfolio, but also stresses AP2’s long track record and skill in the asset class.

“AP2 has more than 20 years of experience in private equity investments.”

Still, tempers are running high.

The report rebuked AP6 for not cooperating with the merger process, citing the fund’s “unwillingness to cooperate on issues that are central to the inquiry”, causing a “delay in the inquiry’s work [that] has also affected the opportunities and conditions for AP2 as a recipient organisation.”

And Halvarsson won’t give any hard assurance that AP6 staff will be incorporated into AP2.

“Given the increased size of funds managed, AP2 is currently hiring for a number of different positions, which are open for anyone to apply. It is too early to say how many will come from AP6.”

Around 25 employees across more than 10 different functions are currently involved in managing AP2’s private equity portfolio.

Merger mania continues to grip Iceland’s pension sector as the country’s pension funds seek lower costs, higher returns, operational efficiencies, and the scale to better negotiate with asset managers.

The ISK 190 billion ($1.5 billion) Lífsverk Pension Fund and ISK 477 billion ($3.8 billion) Almenni Pension Fund are the latest duo to sign a merger agreement, which will create a new operational fund by January 2026.

At the end of this year, ISK 562 billion ($4.4 billion) Frjálsi Pension Fund and dental pension fund ISK 11 billion ($87 million) LTFÍ Pension Fund will also merge. Elsewhere, ISK 557 billion ($4.4 billion) Brú Pension Fund has taken over Akureyri Employees’ Pension Fund (LSA), following its earlier merger with the Reykjavik City Employees’ Fund.

The sector’s steady consolidation means the country has 21 pension funds today compared to 96 in 1980.

But consolidation doesn’t solve growing concerns recently flagged by the OECD and Iceland’s Central Bank about the size of the country’s pension funds relative to the economy. Iceland’s pension funds’ combined assets are now larger than those of the country’s banking system and insurance sector combined, and more than sufficient to buy all listed equities, bonds and bills in the country.

Pension fund assets reached almost 200 per cent of GDP by the end of 2022, up from around 150 per cent in 2018. The OECD states that pension funds are a major source of household mortgage lending; they are the largest investors in the domestic equity market and are among the largest owners of two of Iceland’s three systemically important banks.

Moreover, Iceland’s pension funds typically target a real reference rate of at least 3.5 per cent on their assets, typically above economic growth. The OECD flags that in a low-yield environment, pressure for returns could push pension funds into riskier asset classes and warns that authorities should closely monitor pension funds’ risk-taking, including through stress tests.

Central Bank urges pension fund reform

In 2022, pension fund reform allowed funds to gradually increase their holdings of foreign assets to 65 per cent, reducing exposure to Iceland’s small and volatile economy. But Iceland’s Central Bank is now urging for more reform of the Pension Fund Act, arguing that legislation governing the sector has fallen behind reforms in other parts of the financial system.

The Central Bank noted that while consolidation has brought economies of scale, it also raises challenges for how pension funds are managed and the extent to which they should be able to exercise influence as shareholders in Icelandic companies. It urged for more stringent requirements for board composition, risk-management frameworks, internal audit, compliance functions, and outsourcing oversight to reflect the systemic role of pension funds.

“Increased concentration undeniably brings a certain economy of scale, but at the same time it brings challenges involving, for instance, how pension fund management should be conducted and how assertive the funds should be in their role as company shareholders,” writes the bank. “In terms of total assets, Iceland’s pension funds are larger than the Icelandic banking system and insurance companies combined.”

Iceland’s three largest funds manage around half of the country’s total pension assets and the 15 largest manage 97 per cent.

The bank forecasts more pension fund investment within Iceland and abroad. It warned that foreign investment can entail challenges to financial stability, but pension funds should consider the potential impact on the balance of payments when investing abroad, so that they neither create nor exacerbate exchange rate volatility.

“Furthermore, the Bank considers it important to pass more detailed legislation on pension funds’ internal monitoring systems – including governance, key functions, risk management, and outsourcing – which should be harmonised with other financial market legislation.”

In the Bank’s assessment, the requirements made of pension funds’ key functions should be more stringent than they are currently, and special legislation on personal pension savings custodians should be passed. Furthermore, when the Pension Fund Act is reviewed, consideration should be given to the findings of impartial appraisers such as the International Monetary Fund,” states the Central Bank.

CalPERS’ Peter Cashion tells Top1000funds.com how the pension fund’s strategy to allocate to climate mitigation, transition and adaptation strategies is allowing it to access an untapped corner of the US market where many investors have retreated because of the policy environment.

The US policy backdrop has led many investors to cut back on their climate investments and internal team specialists. But CalPERS, the country’s largest public pension fund, has built its responsible investment team to 18 and is confident it can generate outperformance from investing in climate solutions and tapping into pockets of the market that others have missed.

“We told the board two years ago that we are doing this to generate outperformance,” says Peter Cashion, CalPERS’ managing investment director for sustainable investments charged with overseeing a Climate Action Plan which pledges to allocate $100 billion to climate solutions by 2030.

CalPERS currently has $60 billion invested across climate mitigation, adaption and transition sleeves in a strategy that Cashion says is also complimentary to the fund’s new Total Portfolio Approach, just endorsed by the board. Climate solution opportunities sit across the entire portfolio from venture to infrastructure and fixed income, where CalPERS has a sizeable allocation to green bonds, he says.

That exposure includes a $5 billion allocation to a customised public equity Climate Transition Index that tilts towards companies that have a transition plan and reduces exposure to those that don’t. Companies’ weighting in the index is determined by the amount of green revenue they generate based on data from MSCI, FTSE, and others. It means high emitters are included in the index because these companies will also have renewable energy assets or use carbon capture technology, for example.

“We do detailed diligence to try to validate that number and if it’s 1,2 or 3 per cent that comes from one of these green activities, we want to give them credit for that.”

Although returns from the CTI over the last nine months have been flat (with CalPERS index) Cashion believes this is too short a time period to extract a negative or positive view of an allocation that is notably more resilient.

In a sign of things to come, and proof that investing in sustainability does generate outperformance, he points to the fact that over the nine months of this year the S&P Climate Transition Index is up 50 per cent compared to the MSCI All World Index, up about 20 per cent.

What is most striking is that this has happened despite the negative policy backdrop in the US, he adds.

Companies that integrate sustainability create value and most companies are continuing to increase their investments in sustainability. US corporates are quieter about their strategy in the press; their public statements on the issue are muted and they have left the various net zero alliances.

But he believes most companies “are essentially doing the same thing” as they were before the Trump administration’s policy roll back that includes repealing regulations from the Environmental Protection Agency and the blockage of funds under the Inflation Reduction Act of 2022.

“It is striking because we’ve had all these negative developments from a policy perspective in the US. But underneath, there are actually a lot of positive things happening, and even in the US there is a huge amount of demand and investment happening,” he says, citing demand for renewables because of the increased need for electrification driven by AI, as well as growth in sectors like nuclear, grid improvements and carbon capture although offshore wind and EVs are struggling.

Outperformance in private markets

In private markets, CalPERS has made investment commitments in 13 climate-focused funds that include stakes in companies developing energy optimisation software, drought resistant crops and battery storage.

Cashion says the team focuses on identifying high conviction managers with leading strategies, and has developed a pacing plan for each asset class. But he says it’s too early to see outperformance in private markets because fund investment is a multi-year process.

However, he is confident that returns will be increasingly propelled by the growing synergy between climate solutions and AI. For example, CalPERS has invested in a company using AI and mobile technology to prevent wildfires before they spread. AI is also driving efficiencies and helping reduce emissions in the mining sector.

“Mining companies are increasing efficiency by using AI to find deposits in a way that also saves on emissions.”

CalPERS’ stake in the UK’s fast growing power company Octopus Energy alongside Australian pension fund Aware Super is another example. The private company’s Kraken AI software, used for customer billing and matching electricity demand to the intermittent output from wind turbines and solar farms, is licensed to other energy providers.

“Identifying companies using AI to increase energy or resource efficiency ahead of other investors is an important theme. Wouldn’t it be cool to be in those companies before they IPO?” he concludes.

The skirmish between the New York City Comptroller and BlackRock over climate alignment of the city’s public pension funds – a fight worth a $42 billion mandate to BlackRock – highlights the complexity and impracticality of aligning climate expectations, reporting requirements and business imperatives.

BlackRock, the world’s biggest asset manager, has hit back at calls from New York City Comptroller Brad Lander that three of the city’s largest pension funds drop the asset manager.

Lander, who ends his term as NYC chief financial officer and fiduciary of the city’s $300 billion pension fund portfolio at year-end, called on the Teachers’ Retirement System of the City of New York (TRS), New York City Employees’ Retirement System (NYCERS), and NYC Board of Education Retirement System (BERS), to axe a $42 billion passive mandate with BlackRock because it doesn’t meet their climate expectations.

It is time, wrote Lander in a letter that expressed both the honour and responsibility of his tenure, for these pension funds to evaluate other managers more aligned on climate and with alternative net zero and decarbonisation strategies.

BlackRock has hit back, accusing Lander of playing politics with public pension funds.

“You accused BlackRock of abdicating its financial duty and putting New York City’s pensions at risk,” wrote Armando Senra, managing director and head of the Americas for BlackRock’s institutional business in a public statement. “These statements are another instance of the politicisation of public pension funds, which undermines the retirement security of hardworking New Yorkers.”

He continued: “Any change to one of the five pension plan portfolios would be subject to a review process involving the plan’s board, the NYC BAM investment team, and other relevant stakeholders. Should they take up your recommendation, we look forward to demonstrating the breadth and depth of our capabilities and the tremendous value we deliver to NYC BAM and 750,000 dedicated public servants.”

Comptroller Lander also called for the New York City funds to drop asset manager Fidelity (which manages $384 million for TRS) and PanAgora (which manages $358 million for both TRS and NYCERS) for the same lack of ambition on climate.

A mandate appraisal that fell short

Lander’s call to axe the three managers follows a reappraisal of its mandates across climate alignment. The evaluation process, begun in April this year, revealed 46 of the system’s 49 active and passive public markets managers submitted decarbonisation plans that met NYC pension funds’ climate expectations.

But Lander said BlackRock’s interpretation of new guidance from the US Securities and Exchange Commission under the Trump administration is conservative and restrictive, unlike other asset managers. For example, BlackRock’s policy contrasts to State Street, the pension funds’ second largest asset manager and which oversees a total of $8 billion in US equity index assets.

“State Street’s approach to climate stewardship demonstrates that it is possible for a large global equity index manager to meet the systems’ climate expectations in ways that BlackRock has not demonstrated it is willing to do,” wrote Lander.

BlackRock’s huge size means it owns more than 5 per cent of approximately 2,800 US-listed companies, far more than other investors. Last February the SEC issued new guidance on investor activism, imposing stricter regulatory requirements on fund managers wanting to influence corporate behaviour. The SEC requires firms with 5 per cent ownership to file form 13D with the SEC if they communicate with those companies on proxy voting matters.

BlackRock argues that this position is not simply a matter of filing a longer, more complicated form, but could materially affect its ability to execute index investing for its clients. Moreover, filing a 13D requires a 10-day pause in trading, which would prevent BlackRock from buying or selling the security in order to maintain the index exposure to it, potentially leading to tracking error during that period.

Lander also criticised BlackRock’s climate reporting because it is set at a “very high level” that does not provide specifics about engagement outcomes, with the exception of limited anecdotal “spotlight” columns in their annual stewardship report.

Blackrock’s history of climate integration goes back to 2021 when chief executive Larry Fink announced in his annual letter the company would put climate change centre-stage across its $7 trillion portfolio (Behind Blackrock’s climate pledge). Since then the manager has been put through its paces including in Texas where it was blacklisted by the state legislature and public funds were banned from investing with the manager due to anti-Texas policies, and then three years later it was re-instated. (Texas politicians reinstate BlackRock as manager’s ties to the state grow)

fossil fuel infrastructure on the chopping block

Lander also expressed his ongoing support for the city’s pension funds to cease future investments in midstream and downstream fossil fuel infrastructure in private markets like pipelines and LNG terminals – the strategy would have no impact on existing investments.

“Most midstream and downstream assets are capital-intensive and long-term in nature, and the long-term outlook for fossil fuels is negative as the economy transitions to low-carbon energy. There is no guarantee that future midstream/downstream investments will continue to generate excess returns. Taking this critical step will ensure that the systems’ private markets investments are not financing fossil fuel infrastructure that will make it harder for the planet to limit global warming.”

He also called for ongoing direct engagement with high emitting portfolio companies, independently from the pension funds’ asset managers, particularly targeting utilities which collectively represent about 20-30 per cent of the systems’ financed emissions.

Lander’s climate legacy

Lander has overseen ongoing progress on climate investment at the Bureau of Asset Management, home to the pension funds’ investment teams since he took the helm in 2021. The pension funds divested from thermal coal in 2016 and voted in 2021 to divest from fossil fuel reserves in public equities and corporate bonds portfolios, as well as commit to net zero emissions by 2040.

He has also ratcheted up pressure on asset managers, setting out standards by which public markets asset managers’ net zero alignment plans should be evaluated, and putting those that don’t measure up on watch.

Managers have been asked to engage portfolio companies on decarbonisation, incorporate material climate change-related risks and opportunities in investment decision-making and ensure a robust and systematic stewardship strategy.

Milestones include collectively reducing emissions by 37 per cent since 2019 and engagement with companies, particularly in the utility and financial sectors.

“These strong actions on climate have taken place while the systems have achieved a strong 10.5 per cent combined net investment returns for FY2025, which exceeded their actuarial target of 7 per cent,” wrote Lander.

Alaska Permanent Fund Corporation (APFC), the $84 billion sovereign wealth fund, currently has less than 1 per cent of its portfolio invested in cryptocurrency-related investments. But the positive returns from the small allocation and tailwinds from US policymakers are creating enthusiasm to explore what a larger allocation could bring to the portfolio.

The fund has a $9 million public market exposure to cryptocurrency investments, chief investment officer Marcus Frampton said during the annual board of trustees meeting in Anchorage.

Frampton said the return on the investments has been positive, largely driven by a handful of high performers like a stake in crypto exchange Coinbase, and various Bitcoin miners like MARA Holdings and CleanSpark. Exposure to the emerging Bitcoin treasury model, whereby companies hold Bitcoin as part of their corporate treasury reserves, via an allocation to a software company and a Bitcoin holding company MicroStrategy, also sits in the allocation.

In private markets, one of the best-performing allocations has come via venture capital, where APFC has invested around $30 million –⁠ and earned an 8.5 x multiple, including $81 million of cash distributions. High returns came from initial venture stakes in Coinbase and Circle.

“The current exposure is around $90 million, of which Circle, recently gone public, accounts for the bulk,” said Frampton.

However, he noted losers amongst the winners, like defunct crypto exchange FTX in which APFC lost “a couple of million.”

Elsewhere, exposure to digital assets comes via private infrastructure where APFC is invested in data centres and power, a sector that is benefiting from demand for electricity.

Frampton explained that the returns and volatility in Bitcoin have reduced in recent years.

Since 2010, the currency has experienced five drawdowns of over 70 per cent, with the most recent being between November 2021 and November 2022 when Bitcoin’s value declined by 77 per cent. Yet between July 2010 and December 2021, the currency has delivered a staggering 220 per cent annualised return, with an annualised volatility of 140 per cent.

Citing research from Goldman Sachs, Frampton said the last 10 years are unlikely to be repeated. Bitcoin’s market capitalisation would need to rise from less than 2 per cent of the global money supply today to 47 per cent by 2034 for that to happen. However, he said an annualised total return of 10 per cent is possible.

“If Bitcoin delivered an annualised total return of 10 per cent over the next decade, it would imply that Bitcoin’s market capitalisation would be equivalent to around 2.5 per cent of the global money supply in 10 years which seems more plausible in our view,” he said.

“Goldman says for most institutional investors, it’s [Bitcoin] not recommended. But by saying ‘most,’ they’ve left the door open; they are not saying it’s not recommended for all institutional investors.”

Risks ahead

Because it is new, it is difficult to ascertain how quickly liquidity could dry up in a drawdown. Rebalancing risk is another concern.

“I think it’s fairly liquid, but one of the issues is that it hasn’t been around that long. Although I suppose for rebalancing you’d be buying in a drawdown,” reflected Frampton.

Another unknown is just how to classify crypto investment. “Is it an asset class like a commodity or security, or is it a form of fiat currency because crypto has attributes of both?” he said.

Commodities are traded on commodity markets, and the Commodity Futures Trading Commission (CFTC) has classified Bitcoin and Ethereum as commodities, meaning they can be traded on commodity futures exchanges like the Chicago Mercantile Exchange. Yet bitcoin has fiat currency characteristics as well, and a couple of countries are adopting it as an alternative currency, so it can be viewed as a unit of account and store of value too.

“The fuzziness in its classification may be one of the biggest risks and regulatory frameworks are still evolving,” said Sebastian Vadakumcherry, chief risk and compliance officer at APFC.

Although the GENIUS Act has created more regulatory certainty, a change in administration could turn the clock back. Moreover, trustees discussed the high chance that governments will generally be uneasy about crypto taking over as money because they like to have the ability to expand or contract the money supply as they see fit.

Investors at the meeting also have other concerns. If cryptos don’t operate as fiat currencies, how is their intrinsic value discerned? The likelihood of new “crypto” being mined or developed is not low and the question of how investors would differentiate and pick “winners” remains.

Returns are also difficult to forecast.  Unlike other stores of value like gold which have years of history for investors to chart to help plot the future, the data isn’t available.

“We all think there is a lot of potential, but we have to be cautious. All asset classes have risk and we are in the business of taking risk, but we have to be mindful,” Vadakumcherry said.

Other areas of risk include unknown correlations to inflation and equities, which makes asset allocation modelling challenging. Finally, trustees heard that investors who plough in, also face reputational risk if the sector fizzles out.

Despite concerns about the US sustaining its economic growth and stock market returns, global investors continue to pour money into the world’s largest economy.  

Foreign capital now accounts for some 40 per cent of all investments into US equities, Temasek CEO Dilhan Pillay told a Bloomberg conference in Singapore last week, underscoring foreign investors’ enduring confidence in US outperformance. 

“The question I think we grapple with is, where do we rotate our capital into?” Pillay said. 

“The choice in the US is one thing, but the choice outside of the US is even worse to some extent in terms of volume and your investable space. 

“If you look at the promising markets in terms of equity performance… you look at India, you look at China, look at Europe in the last 12 months or so, the absorption capacity [for capital] is not there for rotation out [of the US] in significant levels.” 

When choices for geographical diversification are limited, Pillay said investors look at rotating into alternative asset classes, which come with currency risk considerations  

He said Temasek was looking to introduce more uncorrelated returns to equities and will increase its allocation to core-plus infrastructure as a result. Temasek does not allocate to fixed income or commodities, which might be used by other investors to achieve the same goal. These assets were likely to still be US dollar-denominated, however. 

As a result, the weakness in the US dollar becomes a huge problem for a non-US dollar-denominated investor because it eats into returns, Pillay said.  

The ICE dollar index, which measures the US dollar’s strength against a basket of six other currencies including the Euro, Japanese yen and the British pound, has dropped 8.5 per cent since the beginning of this year.  

“I’ll just give you one statistic: between 2002 and 2012, if you were Singaporean and invested US stocks, the S&P went up 30 per cent and the US dollar depreciated against the Sing[apore] dollar by 33 per cent, so you have minus 15 per cent in your returns,” he said. 

Hedging costs have also risen as that’s what the majority of foreign investors outside of the US now have to do, Pillay said. It’s come to the point where the fund has to look for a “natural hedge”.  

“It means I’ve got to be looking for things that give me, on a net basis, the return I expect for the risk associated. So some US dollar-denominated assets will not give me a net return that will justify my allocation of capital,” he said. Around 37 per cent of Temasek’s assets is US dollar-denominated according to its annual disclosures.  

But neither Pillay nor Singapore’s other sovereign giant GIC believe the US dollar’s status is being fundamentally challenged. GIC chief executive Lim Chow Kiat said at the same conference that a scenario of complete de-dollarisation whereby the US dollar ceases to be the reserve currency is unlikely to happen. 

“We don’t see that. There aren’t clear alternatives [to the US dollar],” Lim said. 

“If you have a very high exposure to a particular currency or country adjusting it down 10 per cent is not unusual. 

“I would say that there are enough levers for investors and other participants to adjust their [currency] position without causing a big problem.” 

Both funds are still deeply committed to the US market. This July, Temasek chief investment officer Rohit Sipahimalani reiterated the fund plans to invest an additional $30 billion in the US before 2030 and said it is “well ahead of that pace”.  

Similarly GIC boosted its US equities allocation in the year to March 2025 despite reservations around high valuations and the ability for companies to meet earnings expectations. The country remains the biggest recipient of its capital.  

“US exceptionalism, for the time being, doesn’t look as though it’s going to be at risk,” Temasek’s Pillay said. “But you do have things that could cause a little bit of fraying.” 

“It might be that the structural issues we face in the United States are issues that have to be thought about in your risk analysis, but the rotation [of capital out of the country] is not easy, and that’s the reality.”