(Bloomberg) -- Alecta’s $3.2 billion in losses and writedowns have highlighted governance shortcomings at Sweden’s biggest pension fund and the setup of a vital part of the country’s retirement savings system.

The fund, which manages about $117 billion for a quarter of the country’s population, is preparing to publish the results of a review into its structure as soon as this month.

It will be the latest attempt by the company to put a string of disasters behind it after revealing huge losses just over a year ago on bets on Silicon Valley Bank and other US niche banks, which were then followed by writedowns on European real estate.

Since then, there have been half-hearted apologies and a revolving door of leadership, including, embarrassingly, two failed chair appointments. The fund has been excoriated in local news. Three probes have been launched. And through it all, those tasked with overseeing the ship have seemed oblivious to the extent of the course corrections required to reach calmer waters.

Given Alecta’s scale, the losses didn’t threaten its solvency, but the drama has become a long-running crisis. That may partly be linked to the make-up of its board, and the structure of the pension system.

Alecta is the largest of a number of funds managing pension savings for salaried Swedes. It’s governed by a group of people drawn from the nation’s employer organizations and unions. In Alecta’s case, the design dates back to its founding more than a century ago, and critics say it hasn’t moved with the times. The supervisory board holds sway over Alecta, given it chooses who runs the fund, but it’s also so distant it can avoid being accountable for flawed decisions.

“It’s not a very good setup,” said Magnus Henrekson, an economics professor and member of the top governing body at Skandia, another pension fund, which is populated with financial experts.

Alecta’s supervisory board is dominated by “representatives from labor unions and employer organizations rather than individuals who are there because of their competence in finance,” Henrekson said. “This means that their ability to exert control is likely not as good.”

Read More: Why Is Swedish Pension Fund Alecta in the Spotlight?

Speaking last month, Alecta Chief Executive Peder Hasslev addressed the turbulence that continues to buffet his firm, saying: “We have to do better than this.”

What that means in reality is uncertain. And if the imminent internal review doesn’t yield voluntary changes, it’s unclear whether regulators will force the issue. They are currently looking at Alecta’s investment in landlord Heimstaden Bostad AB, and the failed US bank bets.

The fund had a $1.2 billion writedown of the real estate stake last year, and it’s trying to renegotiate the unfavorable terms of the holding, which has limited voting rights.

Power Structure

The collaborative relationship between industrialist owners and the labor unions is a central part of Swedish business history over the past century. In the case of Alecta, it’s a guiding principle behind the fund’s creation, meant to enshrine pensions as a natural part of employees’ remuneration, and to foster labor mobility by allowing pensions to move as workers change jobs. 

According to Sophie Nachemson-Ekwall, an adviser at PwC who has done research on corporate governance, Alecta needs a professional board.

“Alecta is a cornerstone in Sweden’s corporatist tradition,” she said. “It’s hard to see who will change the power structure. Also, Swedish politicians generally are not ready to interfere either, as they don’t have an interest in changing the Swedish labor-market model.”

Alecta is owned by its customers — roughly 35,000 businesses and 2.8 million private citizens — who are represented in equal numbers on the supervisory board, its highest governing body.

The Confederation of Swedish Enterprise, run by some of the country’s most influential business leaders, chooses representatives from their ranks, while the employee members are selected from some of Sweden’s unions.

The supervisory board is responsible for picking Alecta’s chairman and other corporate board members — who in turn appoint Alecta’s C-suite executives.

The Confederation is chaired by Jacob Wallenberg, the 68-year-old co-head of the powerful Wallenberg family, which exerts considerable influence over corporate Sweden through stakes in a number of companies.

Representatives for Alecta and Wallenberg declined to comment when contacted by Bloomberg.

Tone Deaf

The current crisis first broke in March 2023, and Alecta quickly revealed a $2 billion loss from investments in regional US banks. That was followed by the Heimstaden Bostad writedown.

The missteps have been all the more notable because there was ample opportunity to curtail the early damage. The losses weren’t existential given Alecta’s size, and total returns last year, while below some peers, were still 7.4%.

But the company failed to adequately explain the thinking behind the bad investments. Instead, its then-CEO Magnus Billing opted to downplay the losses.

“Sure, 20 billion kronor may sound like a lot of money, but we actually manage 1,200 billion kronor,” was the immediate response. 

While technically correct, it read as tone deaf.

“All of it is really abominable crisis management. It’s like ten mistakes out of ten,” said Paul Rodge, a Swedish adviser who specializes in crisis management and media training.

And then there were the probes. In May, Sweden’s financial watchdog began looking at Alecta’s risk management related to the US bank bets, adding a second investigation into the Heimstaden Bostad investment in September.

In between, Alecta announced that it had hired a law firm to delve into the processes that led to the Heimstaden Bostad purchase. When it found what Alecta described as “deviations from internal rules” and “indications of violations of the law,” Alecta’s board opted to get a second opinion from another law firm.

Because of the different assessments over whether laws were broken, the board decided against filing a police report. 

“A report made on insufficient grounds could have negative consequences for individuals and Alecta’s customers,” interim Chairman Jan-Olof Jacke said at the time, and handed both investigations to the Financial Supervisory Authority to untangle.

The FSA declined to comment before its work is concluded.

The revolving door of executives and board members also hasn’t helped restore confidence. In the last year, Alecta’s head of equities, its CEO and head of real assets have all left or been pushed out, along with the chairman, Ingrid Bonde. 

It’s bungled two attempts to find a new chairman, leaving Jacke — who is also director general of the Confederation of Swedish Enterprise — as interim chair.

According to Jessica Ostberg, associate professor in company law at Linkoping University, it can be tough to find suitable board candidates in the Swedish financial sector, probably due to extensive regulatory and compliance requirements. Add in the FSA probes, and “I’m not that surprised that it’s particularly difficult for Alecta.” 

The failed investments and investigations “are indicators that there have been flaws in the risk management,” she said.

©2024 Bloomberg L.P.