Andra AP-fonden Second Swedish National Pension Fund – AP ICPM Discussion Forum Toronto June 3-4, 2008

Andra AP-fonden Second Swedish National Pension Fund – AP Background to pension reform Reform driven by demographics. From DB to NDC in Autonomous pension system. Future pensions depends on financial stability. Pre-retirement longevity risk transferred to retirees. Pensions based on lifelong incomes. Pensions indexed by average wage growth. Reformed system aims at better incentive structure.

Andra AP-fonden Second Swedish National Pension Fund – AP Pension System at a glance Pension charge, 18,5 % of capped income 2,5 %16 % National Debt Office PPMAP 7 / Private Funds (>600) AP 1-4 Premium pension DC Income based pension NDC National budget Guarantee pension

Andra AP-fonden Second Swedish National Pension Fund – AP Background to AP2 AP2 is one of four ”buffer funds”. New role since USD 37 bn in AUM. Accumulated net inflows since the early 60’s. Net inflow projected to Makes up ~ 12 % of pension system assets. Relatively few binding investment restrictions.

Andra AP-fonden Second Swedish National Pension Fund – AP Governance structure Every separate AP fund a Government Agency. Independent Board hires (and fires) CEO. Board decides on Investment Policy. Investment professionals in charge of ALM, implementation and active risk budget. Annual assessment of AP-funds by MoF reported to Parliament.

Andra AP-fonden Second Swedish National Pension Fund – AP Restrictions Prudent persons principle advocated by AP-funds and MoF consultant. Quantitative restrictions few but in use. Better aligned compensation system advocated by MoF consultant. Risk/return considerations have supreme priority. Economic and Industrial Policy objectives explicitly banned.

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (1) At least 30 % of AUM in Fixed Income instruments ”with low credit- and liquidity risk”. Government bonds and Investment Grade Corporate Bonds. Payment alertness. Binding restriction

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (2) A maximum of 5 % of AUM in Non-listed Assets, Real Estate excluded. Only Funds or Fund in Funds permitted. Relates to Private Equity and Infrastructure. Payment alertness. Transparent performance attribution. AP6 invest exclusively in (Swedish) Private Equity. Binding restriction

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (3) A maximum of 40 % of AUM exposed to currency risk. Above 40 %, global exposures must be hedged. SEK-denominated liabilities. Swedish equities typically exposed to currency risk. 40 % considered to be “generous”. Not a binding restriction.

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (4) Investments in Commodities not allowed. Not considered as a “conservative investment”. Typically not part of “traditional” institutional investor portfolios. Binding restriction with negative diversification implications.

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (5) A maximum of 10 % of AUM exposed to single counterparty or group of counterparties. Governments exempted. Risk concentration and low diversification. Low liquidity. Not binding.

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (6) Market value of Swedish public equity may not exceed 2 % of total market cap. Combined, the AP-funds can not own more than 8 % of the Swedish market. Restriction on influence in Swedish companies. Low risk, diversification, market impact and payment alertness. Not binding.

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (7) A maximum of 10 % of voting rights in one single company. Restriction on influence in Swedish companies. Clarifies the overriding objectives with the AP-funds. Low risk and diversification Not binding.

Andra AP-fonden Second Swedish National Pension Fund – AP Quantitative restrictions (8) A minimum of 10 % of AUM must be managed by external managers. Underlines importance of cost efficient management. Not binding.

Andra AP-fonden Second Swedish National Pension Fund – AP