Status update with the Swedish Fund Selection Agency, November 18th 2022

Today, November 18th 2022, the Swedish Fund Selection Agency arranged a status update event for fund managers at Garnisonen in Stockholm. Executive Director Erik Fransson along with the Unit Heads Majdi Chammas and Magnus Strömer, presented the status of the organization. They also shared the status of the process of forming the procurement process, the fee model, the first categories to be procured and the way forward to create a reliable premium pension system of high quality.

Watch the pre-recorded version of the presentation held during the status update event here External link, opens in new window.. The main information shared during the status update is presented below.

The Swedish Fund Selection Agency is a government authority with a mandate to procure, monitor and quality-ensure the funds in the Swedish premium pension system. The aim is to provide funds of high quality that provide a safer and higher pension for the savers.

The work to establish the new government authority started in 2017 with the pension agreement. It was decided that the future range of funds on the fund platform should be of high quality and be secured by a thorough procurement, with the aim to procure the best funds and fund managers to the platform. After this, a consultation phase followed where legal requirements where evaluated. New legislation regarding i.a. how the procurement should be conducted where passed, and on June 20th, the Swedish Fund Selection Agency commenced its operations.

The laws that govern the authority and the future procurements aim to create a reliable range of funds of high quality. The procured funds on the new fund platform should be suitable for the system, cost-efficient, sustainable, controllable and of high quality. The premium pension system and the fund platform should be characterized by freedom of choice, where the saver has the option to choose the level of risk and investment strategy. The interest of the savers is the main focus when the new fund platform is procured.

The new legislation means higher requirements on both funds and fund managers when taking part in the procurement process. Reliability will be of utmost importance – with focus on high-quality investment processes, the reliability and the investment results will be improved. A strengthened monitoring process will also enable the quality to be maintained over time.

The premium pension system

The premium pension is a part of the national public pension and the national Swedish social insurance system. It can be described as a mandatory defined contribution system where every year, 2.5 percent of your pensionable income and other taxable benefits are allocated to the premium pension, to a mandatory savings account administered by the Swedish Pensions Agency. The funded system means that the saver has the option to choose the level of risk and strategy for the savings. If no choice is actively made, the savings will be allocated in the state preselection AP7 Såfa.

The premium pension system was launched in the late 90’s, and the assets today amount to around 200 billion euros. It is a system with inflows larger than outflows, and in 2040, the assets are expected to amount to around 400 billion euros.

The organization

The start of building the organization has been successful, with hired professionals in all key positions. The organization consists of the Board of the Swedish fund selection agency and its’ office. The office is organized in three units; Procurement and product strategy led by Majdi Chammas, Investment due diligence led by Tina Rönnholm and Operational due diligence and monitoring led by Magnus Strömer. They all have long and extensive experience from the industry and within the fields that the organization will be active in. Four cross-functional teams work across all units.

The gathered competence of the Board covers all major parts of the operations. The Board makes all larger strategic decisions, such as on the business plan, the procurement plan, the procurement design, start of procurement, award decisions and steering documents.

The phases of the procurement process

To be able to deliver on all dimensions of the assignment – suitability, quality, cost, sustainability, and controllability, the three units have created a procurement process divided into phases, with extensive evaluation and monitoring, both before, during and after the procurement.

The process is designed to procure, evaluate and ensure high quality in the most suitable funds for the platform. To be able to maintain quality, the controllability is crucial for a successful monitoring process, both before and after the procurement. A holistic method is applied throughout the process, that will be conducted in project form. Participating members from all three units will evaluate the submissions, ensuring the process from both a quality and a reliability perspective. The final result is a product of the competence and work of all units.

In the first phase, the different categories are analyzed; the range and the quality on the platform today, market trends, the availability of funds, investment strategies, the suitability for the platform, among else.

The RFP is designed together with other parts of the government authority, such as legal and the Swedish Pension Agency’s trading unit, the Investment due diligence team and the Operational due diligence and monitoring team. The qualification criteria and award criteria will be decided by the Board, after which a notice for the procurement is announced.

In the RFP, questions will be asked that aim to ensure transparency and availability of data and information, which constitutes qualification criteria and award criteria. It will be an extensive and detailed material to answer, with the purpose to ensure the quality of the fund manager’s organization. As soon as a notice of the procurement is announced, it will be published on e-Avrop.

To be able to ensure a correct evaluation based on the legal requirements, it is very important that the material submitted is of high quality, well written, correct and completed:

Even if you as a fund manager do not intend to participate in the first procurement, download and look through the material to gain an understanding of the procurement process.
Answer all questions to enable a fair evaluation.
Answer the questions correctly – not based on ambitions or expected future accomplishments.
Everyone in the organization affected by the questions should look through them, to anchor the information on the organization submitted in the material.

When the material is submitted via e-Avrop, a qualification process is initiated where only the fund manages meeting the criteria will pass on to the next step.

After the first qualification phase, the evaluation phase is initiated, where an extensive qualitative and quantitative analysis is conducted.

Quality is a word that is emphasized in the law on the Swedish Fund Selection Agency. In the preparatory work, emphasis is placed on the fact that no support in research has been found for past performance being a guidance of future returns and the quality of the funds. The government is therefore of the opinion that thorough analysis of both funds and fund managers is needed to be able to determine the quality of the funds.

When quality is evaluated, the Swedish Fund Selection Agency’s focus will among else be on these four areas:

Investment philosophy: The investment philosophy should be clear and describe how the fund manager works to create added value. The philosophy must be adopted by the entire organization and must be reflected in your daily work.
Investment process: The investment process describes how the work has been done, where each step and their order should be described – all the way from idea to portfolio construction. Who that does what, and with what mandate should be described, as well as proof of discipline, structure, repeatability and that the process is implemented in practice as it is described. All members of the organization should be prepared to take part of the process.
Investment resources: The investment resources describe who does what in the portfolio management. Here, not only the fund manager and the deputy fund manager are should be described, but also the wider team and the firm wide resources that the fund manager can draw upon. The organization, diversity, turnover, talent management, and the culture are evaluated.
Investment results: Performance is not an indication of future returns, but it will be a receipt that the processes of the fund manager work – that they will be able to deliver on what has been described.

During this evaluation, a lot of quant analysis is done, to verify the work that has been done and has been submitted to the Swedish Fund Selection Agency throughout the process.

Sustainability

The new law and the new fund agreements put emphasis on sustainability and on investment processes with an integrated sustainability perspective, where active ownership is practiced. An evaluation will determine how well the investment philosophy is adapted to sustainability and how integrated the ESG dimensions are in the process, what resources the fund manager has dedicated to sustainability work as well as how this is reflected in the results.

The legislation states that the fund agreements should contain terms and conditions stating that the assets should be managed in an exemplary manner with regards to sustainability. An extensive work of forming a sustainability strategy for the fund platform is underway, where a recruitment of a professional responsible for sustainability is ongoing. The sustainability strategy will be communicated as soon as possible.

Sustainability will be evaluated on two levels. The minimum requirements, or the qualification criteria within sustainability, will apply to all funds on the platform. In addition to this, each procurement will have specific sustainability requirements, that may be the base of the evaluation of the award criteria. The individual saver has then the final decision to choose between funds of different sustainability levels, however with a high base level on the platform.

The interview phase consists of a meeting on site at the fund manager’s office.

After the evaluation process a final decision will be made by the Board on which fund managers will be awarded fund agreements. An award decision will be made public, which is the start of the implementation phase. Together with the fund managers and internal teams, such as legal and the Swedish Pension Agency’s trading unit, the government authority will start preparing for the transition to the new, procured platform.

Monitoring

The monitoring of the funds on the platform will be initiated as soon as the procurement is done. The law stipulates that the term of the fund agreements cannot be longer than twelve years, but the term of the fund agreements can be shorter. Like on the platform today, a breach of contract can lead to termination of the contract. Making sure that the funds maintain high quality will be monitored more extensively than today – a decline in the quality that the fund manager initially showed at the time of the award can lead to a terminated contract. External factors can also create a need for a new procurement of a category.

Transparency

Transparency is crucial during the procurement process. Before the procurement, an open dialogue with the market is held where as much information as possible is shared. The information that is made public will be available on the website, which is continuously updated to ensure equal treatment. No party will have access to more information than any other.

During the procurement process, a structured dialogue will be maintained, which means limited communication with the fund managers or the participants of the procurement. Clarifications may be requested at certain times.

Questions that is submitted during the procurement process will be gathered and answered to the market on chosen occasions, to ensure equal treatment. When the results of the procurement process have been made public, feedback on the procurement results will be offered upon request. The feedback process will ensure a structured, disciplined and well-documented process.

The fee model

The organization is to be financed outside the state budget, in order to secure long term targets and independency. The organization will therefore be financed by fees, paid by participating fund companies. The old model will cease to exist and be phased out over time when new fund agreements are being signed.

The new fee-model, that is currently a proposal subject to referral, is two-fold. It consists partly of a participation fee that will be paid by all fund companies taking part in each procurement. It’s designed to cover all costs, and is estimated to be SEK 18 000. This is to be paid before a submission can be processed.

The second part of the fee-model is an annual fee covering running costs among else, either 0.5 basis points for passive funds or 1.5 basis points for actively managed funds. These fees will be charged all fund companies that have been awarded with a fund agreement.

The fee model will be known up front for all participants and could be factored in when submitting the tenders. Over time, the level of these fees will be reviewed to ensure that they are targeting the actual costs, and might therefore be adjusted. The Swedish Fund Selection Agency is also followed up on its operational efficiency in order to ensure efficiency.

The procurement pace

The transition to the new fund platform will done gradually in a process during which all existing fund agreements will be replaced by new ones as the categories are. The searches and procurements are planned to commence in the spring 2023 with the aim to complete around 30 procurements up until mid-year 2025. It is an ambitious pace, but the focus will always remain on quality, which is prioritized over the time plan. The categories that will be procured first, without mutual order, are:

European equity: active and index
Global equities index
Nordic equities, active
Global Fixed Income

The first category will be announced when the notice is made.

Watch the pre-recorded version of the presentation held during the status update event here. External link, opens in new window.