Sustainability Reporting in capital markets: A Black Box? (ZIFO nr. 30) 2019/6.4.2:6.4.2 Pension funds as responsible investors in Sweden

Sustainability Reporting in capital markets: A Black Box? (ZIFO nr. 30) 2019/6.4.2

6.4.2 Pension funds as responsible investors in Sweden

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The Swedish pension system is based on three pillars.2 A guaranteed basic pension in the first pillar, an income-related pension in the second pillar and a premium fund in the third pillar. Generally, 18.5% of the income is allocated to the pension system, from which 16% of the contributions are directly allocated to current pensioners (to the First trough Fourth AP Funds), and 2.5% of the contributions go to the premium fund (Seventh AP Fund).3456

The First through Fourth AP funds, together with the Seventh AP fund are independent governmental authorities, which manage insurance funds for income- based retirement pensions (Chapter 1, Section 1, SFS 2000:192).7 The Sixth AP Fund manages insurance funds for income-based retirement pensions (Chapter 1, Section 1, SFS 2000:192). The First through Fourth AP Funds together with the Sixth AP Fund are buffer funds, given their role to “cover the deficit when disbursements from the pension system exceed contributions to the system”.8910 The Seventh AP Fund is not a buffer fund, only composed by shares, it operates under different investment rules.11

The Swedish pension system is independent from the national budget and from the second pillar occupational pensions, and the contributions are transferred to the buffer funds, which manage their own finances, and avoids Government intervention by raising contributions or borrow money to fund pensions.12

One quarter of the social security contributions is made to each of the first through fourth AP funds, (Second Part, Provisions Regarding the First to Fourth AP Funds, Chapter 2, Section 1 “Allocation of Assets”, SFS 2000:192), and therefore, each of these funds pay a quarter of the benefits due from the state pension system (Second Part, Provisions Regarding the First to Fourth AP Funds, Chapter 2, Section 2 “Pension Payments”, SFS 2000:192, and SFS 2004:847).1314 The Sixth AP Fund does not receive contributions and therefore, does not pay benefits.15 The Sixth AP Fund invests exclusively in private equity.16 According to Chapter 5, Section 1 of the SFS 2000:192, the Seventh AP fund manages the Premium Savings Fund and the Premium Choice Fund, for citizens who have not chosen private fund managers in the Premium Pension Authority system.1718 In 2014 the AP funds had a total of USD $153,2 of assets under management and in 2015, a total of USD $151,0.19

Occupational pension schemes, based on collective bargaining agreements, cover more than 90% of the Swedish workforce.2021In Sweden quasi-mandatory occupational defined benefit agreements are established between trade unions and employers.2223

In terms of responsible investment the Swedish pension funds occupy the 5th position of the MMGPI.2425The Swedish pension system is classified by the MMGPI as a B-grade system “A system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system.”26

Sweden’s retirement income system was reformed in 1999.27 The main reason was the financial instability of the supplementary (ATP) system.28 The pension system is in transition from a pay-as-you-go system to a funded approach and it changed from a defined benefit system to a defined contribution system.29 The reform introduced (for the first time) responsible investment related investment legislation on its approximately € 65 billion Swedish National Pension Funds (first pillar), the buffer AP Funds (AP 1, AP 2, AP 3, AP 4 and AP 7) in January 2001.30

The Swedish National Pension Insurance Funds Act (SFS 2000:192) does not refer to environmental and ethical investment considerations by the AP Funds. This requirement was included in the preparatory documents that led to the SFS 2000:192, as the Government Bill 1999/2000.31 The Government Bill states that the AP Funds must “in the long term maximise the return in relation to the investment risk” and that “the total level of investment risk must be low” and that “Given their role as managers of public pension funds, the (AP) funds must act in such a way as to promote public trust. Ethics and environment are to be taken into consideration in investment activities without deviating from the overall objective of a high rate of return”.323334 The AP funds are therefore, required by law to integrate ESG risks without compromising the achievement of high returns to the beneficiaries.35 However, no further guidance on how to do it is given, leaving the AP funds with freedom to implement the new policies differently.36 The Swedish Government gave the AP funds similar investment rules to foster competition between them, expecting higher competition to deliver higher returns.37

The AP funds responsible investment’ compliance and engagement is closely evaluated by the Government and by the Ethical Council. The Ethical Council has the responsibility of advising the first four AP funds.38 Since 2007, the First through Fourth AP Funds coordinate their ESG approach through their jointly formed Ethical Council. The AP Funds are represented at the Ethical Council by an appointed member each.39 The Ethical Council engages directly with investee companies on ESG risk integration and disclosure. Each fund appoints one ordinary member to the Ethical Council. This structure of the funds coordination with the Ethical Council allows for greater scope for influence, they become a more attractive investment partner and cost efficiency.40

The AP Funds and the Ethical Council are signatories of the UN-supported PRI and actively cooperate international with organizations such as the CDP, the Institutional Investors Group on Climate Change and the International Council on Mining and Metals.41

a) Regulatory framework

Swedish pension funds are subject to the European requirements of the IORP Directive (2003/41/EC), and more recently of the IORP II Directive (2016/2341) which was not yet transposed into Swedish national law. The transposition of the IORP II Directive expected in early 2019 was delayed, similarly to other EU countries.42 Furthermore, as part of the EU, Sweden will be part of any upcoming regulatory framework to support and promote sustainable investment in the EU, in line with the EU Action Plan to achieve their climate change commitments.43

The National Pension Insurance Funds Act, 2000 (SFS 2000:192) is the most important Swedish pension legislation. It states the goal of the income pension system, from the first through the fourth AP funds and defines the management objectives of the premium pension system, the Seventh AP Fund.44 The operations of the Sixth AP Fund is governed under the Sixth AP funds Act (SFS 2000:193).

As the National Insurance Pension Funds Act (SFS 2000:192) best puts it in Chapter 1, section 2, please see the translation below:

The First to Fourth AP Funds manage assets which, pursuant to section 6 of the Social Security Fees Allocation Act (SFS 2000:981), section 8 of the State Retirement Pension Fees Act (SFS 1998:676), and section 6 of the National Pension Fees Act (SFS 1994:1744) are to be allocated to the First to Fourth AP Funds.

The Seventh AP Fund manages assets which, pursuant to Chapter 8, section 2, first paragraph, sub-section 2 of the Retirement Pension (Income-Based) Act (SFS 1998:674) are to be allocated to the Premium Savings Fund or Premium Choice Fund. (SFS 2000:998).

The Swedish Pension Agreement and Pension Reform (Ds 2009:53) provides the content and scope of the pension agreement, the causes and principles of the reform and how the pension system works.45

The supervision of public pensions is the responsibility of the Social Insurance Agency.46 The Swedish Financial Supervisory Authority is Sweden’s financial regulator, responsible for regulating insurance companies, also regulates and supervises the activities of the pension funds.47

New investment rules are expected in 2019, requiring the AP funds to integrate “responsible investments and responsible ownership”.48

b) The Fourth Swedish National Pension Fund (AP4)

As mentioned above in section 4.2 (above) the Fourth Swedish National Pension Fund (AP4) is one of five buffer funds in the Swedish pension system. Together the AP-funds represent around 14% of the national pension system and act as a buffer to cover future pension payments.4950The AP4, together with the first three AP funds and in cooperation with the Ethical Council, implements the Swedish legal requirements of responsible investment without compromising the high returns.51 It has the mission to maximize shareholder value over time, and is active in the areas of climate change and corporate governance.52 As of June 2016 it has an estimated SEK 312 billion of assets under management.53 The AP4 is a governmental authority regulated by the Swedish National Pension Funds Act (2000:192).54 The Investment rules for the first four AP Funds are part of the National Pension Funds Act (2000:192).55

The AP funds in general follow the Swedish constitutional principles and also follow closely all the international conventions signed by Sweden (e.g. human rights, anticorruption, environment, weapons.56 They reflect the Swedish basic cultural principles.57 ESG risk consideration is enshrined in the Swedish culture and embedded legally. As stated in AP 4 Ownership Policy:

“Democracy, the equality of all people, individual freedom and dignity, and sustainable development are core values faithful to the letter of the Swedish constitution.”58

‘The fundamental values of the Swedish state are also expressed in the international conventions that Sweden has signed, including conventions on human rights, labour, corruption, and inhumane weapons, partly in the support Sweden gives to initiatives such as the UN Global Compact and the OECD Principles for Multinational Corporations, but also in Sweden’s standpoints on questions of international law.”59

Public policy has scaled-up responsible investment among Swedish pension funds and show how a supportive regulatory environment can make a difference. In any case, lack of guidance about what to report and how to report ESG risks, and how to implement responsible investment strategies also exists in Sweden. Although considered frontrunners when compared to other pension funds globally, the AP Funds and the Ethical Council have been criticized for engaging with mining companies linked to human rights violations and environmental abuse in Latin America, rather than excluding them from their portfolios.60 Pressure has come mostly from the social media, NGO’s and general public, rather than from the members.

c) Relevant organizations for promoting sustainability and responsible investmentreporting in in Sweden

In addition to the relevant work of organizations active in ESG disclosure awareness globally and also in Sweden, such as the CDP, the GRI, the IIRC, the UN Global Compact and the UN-supported PRI, there are other relevant responsible investment organizations in Sweden. These include the Sveriges Forum För Hållbara Investeringar (Swesif) which is Sweden’s Sustainable Investment Forum, the Swedish equivalent of the Eurosif, the Sustainable Investment Research Platform and the Global Engagement Services. These organizations were explained in Chapter 3 (see section 2.3).

Deze functie is alleen te gebruiken als je bent ingelogd.