$106 Billion Swedish Largest Pension Fund Alecta FAQ on Investments in United States Banks
18th March 2023 | Hong Kong
Swedish largest pension fund Alecta with $106 billion has issued a frequently asked questions on investment in United States banks. (Swedish largest pension fund Alecta with $106 billion has lost $1.14 billion in United States Silicon Valley Bank & Signature Bank with more exposure in First Republic Bank. Alecta board had asked CEO Magnus Billing to initiate investigations for narrow bets on the 3 United States banks with Swedish authorities also asking Swedish investment funds on their exposure to United States banks). More info below.
At Alecta, we manage the occupational pensions of 2.6 million private individuals and 35,000 companies in Sweden. Our job is to maximise the value of occupational pensions for our corporate and private customers.
- Founded in 1917
- Owned by 2.6 million private and 35,000 corporate customers
- Only collectively agreed occupational pensions like the ITP
- Manages all ITP2 pensions (defined benefit occupational pension)
- Default option for ITP 1 and TPK (defined contribution occupational pension)
- SEK 1,120 billion in assets under management
- One of the biggest investors on the Stockholm Stock Exchange
- One of Sweden’s biggest property owners
- The 5th biggest occupational pension company in Europe
$106 Billion Swedish Largest Pension Fund Alecta FAQ on Investments in United States Banks
1) What has happened?
In recent years, Alecta has invested money in the American banks Silicon Valley Bank and Signature Bank, which have now been taken over by the Federal Deposit Insurance Corporation (FDIC). For Alecta, this means losses of approximately SEK 12 billion. This obviously represents a significant loss in a single investment, but essentially, there will be little impact on our customers’ pensions as Alecta manages total capital of over SEK 1,000 billion.
2) How could this happen?
Alecta manages capital totalling over SEK 1,000 billion. To grow this capital, we need to invest it in different types of companies, fixed income securities and bonds, and we need to invest outside of Sweden. The two banks that have now been taken over by the FDIC have been in our portfolio since 2017 and 2019 respectively. We have invested in them alongside some of the world’s largest asset managers such as Blackrock, Vanguard and State Street. Until Thursday 9 March, a virtually unanimous global analyst community recommended that investors hold or buy more shares in these banks.
In 2022, Alecta learned that the interest rate increases had an impact on the liquidity of Silicon Valley Bank, and, at that time Alecta, together with other investors, engaged in dialogue with the bank to ensure that the bank had a strategy for the future. On Thursday 9 March, the bank announced a new share issue that was not underwritten by any major investors and a sale of bonds at a loss. We consider that this was an error and the trigger for what is known as a bank run, where customers withdraw their money quickly, causing share prices to plummet. The failure of Silicon Valley bank then led to a loss of confidence in US regional banks, and trading in the shares of several banks, in addition to those in which Alecta has invested, was temporarily halted on Friday 10 March and Monday 13 March.
3) How much money was lost?
Since both Silicon Valley Bank and Signature Bank have been taken over by the FDIC, we expect that the full value of our investments in those banks is lost. We expect the total amount to be approximately SEK 12 billion.
4) How much more money could be lost?
Alecta has a holding in a third US bank, First Republic, which is an old and stable bank with a completely different business model and low loan losses, but which has suffered a bank run due to the generalised unrest. They received external funding overnight between Sunday 12 and Monday 13 March. Shares fell sharply on Monday but appeared to recover on Tuesday, according to trading indications. We have invested a total of SEK 9.7 billion in this bank.
As regards Alecta’s remaining portfolio, we do not currently see any contagion effects, and this was confirmed by the Swedish Financial Supervisory Authority, which shares our view.
5) How was it possible for Alecta to invest in the three US niche banks most affected by the crisis?
Given the low interest rate market in recent years, Alecta, like many other investors, has had to find investments that provide better returns. The drawback is that this often means higher risk. We, along with a largely unanimous body of analysts and some of the world’s largest asset managers, concluded that these banks would provide good returns.
6) Has Alecta been investing in crypto banks?
No, these are not crypto banks. These are three separate banks with completely different business models. Silicon Valley Bank works mainly with venture capitalists and companies in the technology and life science/healthcare sectors, ranging from start-ups to more mature companies.
Signature Bank’s main focus is financing rent-controlled blocks of flats and commercial properties, but it also strives to be at the forefront of technological development, and has developed a payment platform where customers can transfer USD in real time. A number of cryptocurrency firms were attracted to the platform and deposited their money there, representing around 15 per cent of the bank’s total deposits. The Bank’s involvement with digital currencies (crypto) is limited to deposits in US dollars. Signature Bank does not invest in, trade, hold or manage digital currencies, or accept digital currencies as loan collateral.
First Republic Bank is approximately 40 years old and focuses primarily on mortgage lending and wealth management to an affluent middle class. Since it was founded, the bank has had extremely low loan losses and high customer satisfaction.
7) Why did Alecta sell holdings in Handelsbanken and Swedbank to invest in US banks?
These are two separate investment decisions. Alecta decided to invest in the US banks in 2017 and 2019. At that time, we had investments in four major Scandinavian banks: Swedbank, Handelsbanken, Nordea and SEB. We started selling off shares in Swedbank and Handelsbanken in 2021 and 2022 and exited the two banks completely in 2022.
The investments in the US banks provided very good returns for several years, but have proved to be unsuccessful, despite the fact that we and a large number of professional investors and analysts judged them to be investments that would provide good returns to our clients.
8) How will my pension be affected?
Customers with an ITP 2 defined benefit pension (applies to those born in 1978 or earlier)
Your pension is not affected by this in any way. The value of your pension is determined by your salary level and the number of years in which you have had the ITP 2, not by Alecta’s returns. Those who currently receive ITP2 payments are not affected either. Your pension will be paid at the same rate as before. This is because Alecta’s managed assets far exceed what we will be paying out to our customers in the future. This is known as the collective funding ratio and is a measure of the size of Alecta’s assets in relation to future payments. Our current collective funding ratio is 173 per cent, which in simple terms means that for every SEK 100 we have to pay out, we currently have SEK 173.
9) Customers with an ITP 1 or ITPK defined contribution pension
Your pension will be paid at the same rate as now for the remainder of the year. While returns are a factor when calculating your new pension amount at the end of the year, the impact of the US banking collapse will only marginally affect your pension. The losses in Silicon Valley Bank and Signature Bank correspond to 1 per cent of the total pension capital, and despite the write-down of the assets in the US banks, Alecta has generated a positive return on your pension capital so far this year. After setting the value of both US banks at zero, the return so far this year has been 1.4 per cent.
10) What steps is Alecta taking to save as much money as possible?
Intensive work is currently under way to ensure that Alecta’s customers’ rights are safeguarded. We have legal representation on-site in the US to manage the legal process.
11) What steps is Alecta taking to restore customer confidence?
We work to gain our customers’ trust every day. We have conducted interviews with virtually every media outlet available to explain what has happened, what is happening now and how it affects our customers’ pensions. We are regularly updating our website and our customer service team is available to assist our customers.
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