Riksbank under fire amid pension fund fears

A former Riksbank official has criticized the bank’s slow reaction to the current financial crisis as concerns mount about the vulnerability of Sweden’s pension funds to a continued drop in the stock market.

So far, Sweden’s large pension companies – public funds charged with managing the pension savings of Sweden’s taxpayers – have weathered the recent wave of falling stock prices.

Sweden’s Financial Supervisory Authority (Finansinspektionen – FI), which tracks the funds’ performance, believes the pension companies continue to fulfill their solvency requirements in accordance with Swedish law.

However, the agency notes that lower stock prices and falling interest rates have had a negative impact on the companies’ capitalization.

Despite the fact that the pension companies all had substantial buffers at the start of the current wave of economic turmoil, the persistence of uncertainty in the markets and dropping share prices has made the companies more vulnerable, according to FI.

“A continued sharp drop in stock prices and interest rates could alter the current assessment of the companies’ resistance [to continued turbulence],” said the agency in a statement, referring to the pension companies’ limited capacity to lower their risk profiles by selling off risky assets in the short term.

Meanwhile, Kerstin Hessius, current head of the 3rd AP Fund pension company and a former vice-governor with the Riksbank, slammed the bank for taking its time in reacting to the current crisis.

In an article published in the Svenska Dagbladet (SvD) newspaper, Hessius said it was time for her former colleagues to wake up and take action.

“Hello, my dear former colleagues, have you gotten stuck in your models and the old national accounts built on historical information?” she writes.

Hessius thinks Wednesday’s 0.5 percent repo rate cut, which brought Sweden’s benchmark interest rate down to 4.25 percent, was too little too late “and wasn’t even initiated by the Riksbank”.

Instead, she calls upon the Riksbank to drastically cut interest rates down to 2.25 percent, and to propose to the government that it set up a public guarantee for the Swedish banking system.

She also believes the recently doubled savings guarantee of 500,000 kronor ($71,000) is insufficient.

Moreover, Hessius urges the Riksbank to take a stronger leadership role to head off problems before they occur.

“The reaction has been reactive, they alleviate problems after they’ve materialized…in this situation someone must dare to lead, be proactive, and not lay blame on the crisis being global,” she writes.

“It’s the Riksbank which has the responsibility and the knowledge. Take responsibility and act swiftly! Other countries in Europe will follow.”