Attractive equity prices have led to an increase in the risk appetite of several Swedish pensions institutions in recent months. Although markets remain vulnerable, the policy to opt for higher equity exposure seems to have paid off. According to Sweden’s financial supervisory authority, Finansinspektionen (FI), local insurance companies have succeeded in rebuilding the capital buffer they had before the crisis.

“Since the spring of 2009, financial markets recovered themselves rapidly. Risk-taking has increased – with rising exposure to equities and bank and corporate loans. This development means insurance companies have entirely regained the buffer that they had before the crisis,” the FI stated in its report, the Insurance Barometer, in late October.

Equity risk currently comprises the most risk (40 per cent of capital reserves) within occupational pension portfolios, followed by interest rate risk (25 per cent).

Christian Ragnartz, chief analyst at AP7, the Swedish Seventh National AP fund, says AP7 has increased its allocation to gloval equity over the past 12 months. AP7 is the default fund of the premium pensions system and currently manages assets exceeding SKr80bn (e7.69bn).

“When credit spreads were at the widest, we had many discussions on how to handle the situation, especially with the new inflows. We decided to use our long-term horizon, so instead of reducing our allocation to risky assets, we kept our high allocation and bought even more equities in late 2008,” he says.

During the turbulent past year, AP7 has maintained focus on its long-term investment horizon of 30-40 years, which is possible because it does not have to follow the same solvency requirements as Swedish occupational pension funds and pension companies. According to Mr Ragnartz, at first the strategy led to losses, but it soon enabled AP7 to recoup its earlier losses from 2008.

“The large exposure to equities initially resulted in losses, but the current reversal and the fact that we did buy equities at attractive levels too, means the moves balanced themselves out. So far this has been the right choice,” Mr Ragnartz says. AP7’s portfolio is invested in private equity (8 per cent) and hedge funds (2 per cent), bonds (8 per cent) in addition to the 82 per cent equity exposure.

The SKr8.4bn PP Pension, the pension fund for journalists and media employees, has also expanded its equity portfolio and opted for a higher risk approach over the past year. Between December 2008 and August 2009, its equity exposure went up from 16 per cent to 31 per cent. “The system is recuperating from the blows of last year. We seem to be over the worst. As this is the first time funds are witnessing turbulence of this scale and it is not yet certain where we are in the cycle, we will have to be flexible going forward,” says Viveka Ekberg, managing director at PP Pension.

Although the setting now seems brighter, the FI warns that there is still insecurity in the markets. “The gross national product in Sweden will reduce by 4-5 per cent this year and unemployment will reach 11 per cent by the end of next year. The worsening economic development may lead to another fall in asset prices as investors swap more risky equities for government bonds. It is important that insurance companies continue to maintain their solvency levels with good margins,” the FI recommended.

According to the FI, solvency levels at 14 Swedish occupational pension funds increased from four to 11 during the first half of 2009, reaching levels similar to prior the crisis. At the same time, the required solvency margin went up to SKr3bn, reaching the same level as in late 2008, and the traffic light rating rose from one to two. At PP Pension, additional risk-taking paid off. As markets improved, returns went up from -3.2 per cent in 2008 to -0.7 per cent in mid-2009. The consolidation level improved likewise from 115 per cent to 144 per cent.