AP7 is the state alternative to the private investment funds offered within the Swedish premium pension system. The fund has been the best performing State-Owned Investor globally in the past decade, and recently announced plans to increase the allocation to alternative asset classes from 4% up to 20% of the portfolio. We had the pleasure of speaking with its CEO, Mr. Pål Bergström, about the fund’s success, strategy, and future objectives.
[GSWF] Can you please shed a light on Sweden’s pension system and on AP7’s role?
[AP7] Since the reform in year 2000, there are two components in the public pension system regardless of occupation, including income pension (16%, “pay-as-you-go”, AP1-4) and premium pension (2.5%, AP7 by default). In that context, our role is to cater the needs of our 5.5 million savers and ensuring growth for their pension. Savers that do not want the default option (AP7) can choose from 400 private alternatives. A few years back, the government established a fund selection agency that is currently narrowing down the number of choices.
[GSWF] The fund has quickly grown to US$ 110 bn in AuM and 5.5 million savers – what is AP7’s projected AuM by 2030?
[AP7] Projections are very difficult to make as they are heavily dependent on the fund returns, but historically, we have doubled our AuM every four years. Demographics are stable, but even if we do not grow the number of savers, we expect the fund to double by 2030.
[GSWF] How did AP7 have such strong returns in the past decade, and how do you plan on keeping up in the next 10 years?
[AP7] The default alternative has a life-cycle-profile and given that 85% of the public pension provision is going to the income pension with low-risk characteristics (comparable to an indexed bond), AP7 can afford to be riskier and bear more leverage (currently at 15%). Most of the capital is in accumulation phase, which has driven the fund to a larger allocation to the better-performing Equity fund (90%). As the system matures, the allocation would gradually shift towards the Fixed Income fund, so our returns may come down. We need to understand our savers needs and the role the pension from AP7 will play in their total pension and structure our offering based on that.
[GSWF] Real estate and private equity represent 4% of your portfolio – what is the target allocation in the next 5-10 years?
[AP7] We have the mandate to increase our alternative assets up to 20% of the total portfolio. We are building our internal capabilities in real estate, initially focused on Sweden and the Nordics, via fund investments with managers (e.g., a joint venture with AMF), but that may evolve with time. In the future, we will also be looking at real estate debt and at infrastructure as a separate asset class.
[GSWF] Why have AP7 Equity and AP Fixed Income funds been decreasing their management fee to 0.05% and 0.04%?
[AP7] The idea is to lower the % cost for the savers, as we increase our AuM. We are a not-for-profit agency, so this is a decision by the board, to ensure we have sufficient buffer but do not penalize the saver. We will also internalize more as a way of lowering those costs.
[GSWF] How much does China represent in your portfolio (Asia, 18%), and how do you see that changing in the future?
[AP7] Our weight in China has been static as it is aligned to the MSCI weightings (roughly 3.5% of the portfolio), but it is something that we are actively looking into. Going forward, we will factor geopolitical risk in our weightings more significantly.
[GSWF] Can you please shed a light on AP7’s exposure to fossil fuels, and on your active ownership / engagement policies?
[AP7] Our exposure to fossil fuels comes via our global approach (MSCI), but it is something that we are looking into. We maintain an active blacklist, which focused first on coal companies and is now moving into oil producers. In addition, we are very committed to Climate Action 100+, which is a good way of putting together the expertise of asset owners. Up to 10% of the Equity Fund can be invested in transition assets, working together with LGIM, and we have been recruiting an internal team for sustainable investments.
[GSWF] Personally, you have been at the CEO post for less than a year now. How do you compare it with your previous role at Swedbank, and what are your main goals for the next 3 to 5 years at AP7?
[AP7] It is a smaller and a welcoming organization so the change has been positive. To me, this is a great intersect between the public service and goals of the private sector. Going forward at AP7, we have four priorities for 2027:
Understanding our savers and having an investment process to integrate this seamlessly;
Integrating sustainability work into our investments across asset classes and regions;
Building up our internal capabilities to become good investors in alternative assets; and
Staying as an attractive employer, as we hire more talent.
