How Sweden’s pension consolidation is leading to a change in investment approach
Sweden’s pension system is going through a process of consolidation, which for some funds like AP2 means a change in investment approach (Nora Lorek/Bloomberg)
Good morning. Pension reform is the flavour of the month in many jurisdictions. We have covered some of the changes going on in the UK recently but it is by no means the exception.
I recently spoke to Eva Halvarsson the chief executive of Sweden’s AP2 which has swallowed up the AP6 pension fund as part of a consolidation programme - growing to $56bn in size.
The aim is to streamline the management of the buffer capital of the pension system and achieve more effective and cost-efficient management.
As a result five funds within the Swedish National Pension System have become three, with AP1 consolidated into AP3 and AP4, and AP6 integrated into AP2.
Halvarsson said: “The process is extensive, includes strategic, legal and practical elements – from determining the best asset allocation for the fund including the new capital, to mapping individual investments, building organizational capacity to take on the increased capital, and addressing a large number of practical issues to implement the integration.”
A challenge stems from the fact AP2 and AP6 had very different investment approaches. AP6, which officially merged into AP2 on January 1 this year, invested exclusively in private equity while AP2 had a more diversified approach.
But the merger will mean an increased allocation to private equity - which for AP2 has been increasing gradually from 10 per cent in 2024 to 12 per cent in 2025.
Halvarsson said: “AP2’s mandate, as a diversified buffer fund, is unchanged, with a mission to manage the Swedish people’s pension capital responsibly, with consideration to both return and risk.
“Parliament's decision confirmed that AP2’s asset allocation – including private equity – will continue to be guided by what best serves the pension system, which is determined through an asset and liability management analysis.
“When we were informed about the reform, AP2’s board commissioned a comprehensive ALM analysis, which concluded that a strategic allocation of 15 per cent to private equity is appropriate for the fund.
“This is a high proportion compared to other pension funds globally. A higher allocation would improve expected returns slightly but would also significantly increase risk, thereby reducing the risk-adjusted return.”
AP2 also conducted an extensive international benchmark alongside this analysis.
The increased allocation to private equity is funded by a decrease in allocation to real assets.
One of the many trends seen across the globe is economic nationalism, with governments using their pension systems to invest more in the local economy.
Halvarsson said: “According to our mandate, we are not permitted to take industrial policy considerations into account in our investments; we must invest based on the return and risk that best serve the pension system.
“Having said that, the structure of the Swedish pension system means that there is risk‑tolerant pension capital available in the Swedish equity market.”
