Sweden’s AP7, the default manager of the premium pensions system, is undergoing major changes following new government legislation, aimed at improving the suitability of the fund for older investors. The changes come despite the fund outperforming the average in the Swedish premium pensions system, with returns of 35 per cent and 46 per cent in 2009 for the two sections of AP7.

AP7, which has e8.5bn in assets under management, is looking to replace its current options: Premiesparfonden (premium savings fund) and Premievalsfonden (premium choice fund). The former caters for those who have not actively selected a pension fund manager from the others available in the Swedish system, while the latter is for those who have previously selected another fund but wish to return to AP7.

“Today, AP7 has only one risk level for everyone,” says Richard Gröttheim, deputy chief executive of the fund. “This level is too low for young savers, and it’s a little bit too high for older investors. The main reason for this change to the fund is to get a product that automatically changes the risk level for different ages.”

AP7’s current setup sits alongside the main government pension, known as the income pension, which is effectively an index-linked bond. The Swedish government believes that now is the time to update AP7 in order to keep the system fair; the fund’s slogan on its website says its aim is to ensure that “people who are either reluctant or unable to choose a fund manager for themselves should receive at least the same pension as others”.

The two existing parts of AP7 will shut on May 24 this year and be replaced by a new system. The default option for all savers, called Såfa, will consist of two new ‘life cycle’ funds. The first is a global equity fund and caters for individual savers up to the age of 55. Once past this age, savers will transfer to the second fund, which is invested entirely in a wide range of fixed income. Savers will see their money gradually transfer from equity into fixed income at a rate of three per cent every year until age 75. All this is done automatically and requires no engagement on the part of the individual, although savers can stil actively select the fund.

Mr Gröttheim explains the risk profiles of the funds: “From age 55, the risk will be in line with a typical emerging market fund, and then it will scale down. Within the equity pot, we will use different techniques and financial instruments to move from a diversified global equity fund up to something that is more in line with emerging market risk.”

As part of the move, AP7 is looking to sell off around SKr15bn (e1.49bn) in Swedish equities to fund its switch to a diversified global equity fund. Mr Gröttheim says this is part of the changing investment strategy, raising the fund’s risk from its current level using derivatives, among other techniques. In addition, last year AP7 pledged to invest e300m over three years in private equity projects supporting clean technology.

In addition, the Swedish government asked AP7 to set up an extra level of flexibility for more engaged or knowledgeable savers. Savers can select one of three risk level products – one high risk, one medium risk, and one low risk – all made up of different mixes of equities and bonds. This will allow those that actively select AP7 as their fund – who would previously have been placed in the premium choice fund – to ensure they have more say in how their money is invested, while maintaining the fund’s overall investment strategy.

Mr Gröttheim says: “This is a big change. We have been working towards this for a year, and now we are moving into the implementation phase. For the saver it will be a development in the system that makes government pension products more attractive.”