The Fourth Swedish National Pension Fund, also known as AP4, reported a 9.1% return for 2017. It has generated an average annual return of 7.3% during the last 10 years, and a 6.1% return per annum since its inception in 2001.
The fund’s capital increased SEK30.1 billion ($3.68 billion) during 2017 to SEK356.6 billion, outperforming the fund’s income index and the long-term return target of a 4.5% real annual return. Net outflows to the national pension system totaled SEK 7.4 billion during the year.
“On the back of generally favorable performance for the global equity markets, AP4 reports a strong return for 2017,” said Niklas Ekvall, CEO of AP4, in a release. “Interest rates were basically unchanged at extremely low levels, and fixed-income investments therefore delivered low returns during 2017.”
The AP funds make up about 15% of the Swedish pension system, and act as a buffer to cover future pension disbursements. The AP funds also contribute to the long-term financing of the pension system.
Since 2009, payments to current pensioners have been larger than the contributions to the pension system from current wage earners, which has created a negative net inflow. Funds are therefore paid-out from the AP Funds annually to meet the pension payments to current pensioners. According to forecasts by the Swedish Pension Agency, it will have to take capital from the AP funds over the next 25 to 30 years to cover pension disbursements.
For 2017, AP4’s total asset management costs were 0.10%, with operating expenses of 0.06%, and commission expenses of 0.04%, expressed as a percentage of average fund capital under management. According to a study by CEM Benchmarking, the fund’s cost level was 46% lower than comparable international pension funds.
“AP4 will continue to develop sustainable investments in the focus areas [of] climate and environment and corporate governance,” said Ekvall. “Our low-carbon strategies increased to almost 31% of the global equity portfolio during 2017.”
Ekvall said the fund’s goal is to increase sustainable investments, and to widen their scope.
“We are doing this to lower the risk in the portfolio and create conditions for better returns,” he said. “Active corporate governance is AP4’s most important tool for influencing and interacting with the companies in which we are a shareholder.”