As a result of proposed legislative changes to implement EU Directive 2003/41 (on the activities and supervision of institutions for occupational retirement provisions), Swedish Insurance companies will shortly have increased possibilities to invest in private equity as an asset class. This is evident from a governmental committee report that has recently been released (SOU 2004:101). Among other things, Swedish insurance companies (read life insurance companies) providing occupational pension insurance will be subjected to fewer restrictions when investing restricted capital, which in turn will increase the ability of such companies to invest pension capital into private equity funds.

Under current legislation Swedish insurance companies (who are not engaged solely in the reinsurance business) are obliged to posses’ assets equivalent to the technical provisions (i.e. debts to the policyholders) placed in certain specific types of asset classes. Additionally there exist rules concerning matching, diversification, asset limitation, liquidity etc (jointly referred to as investment rules). The asset classes that are currently available for purposes of covering the technical provisions are listed in the Insurance Business Act (the "IBA").

It is a requirement in order for private equity investments to be applied to cover the technical provisions that the investments are made in shares in Swedish public limited companies (or the equivalent in other OECD states). Such shares must further be liquid (transferable at short notice with limited loss of value and at low costs), and this normally means that the shares must be listed on a stock exchange open to the public. At the very least the shares must be issued by public limited companies (although not necessarily be listed). These requirements result in that Swedish insurance companies can not under normal circumstances use private equity investments for debt coverage purposes. This being due to the fact that most private equity funds are established by means of other vehicles than public limited companies (often as limited partnerships under the laws of low tax regimes such as Guernsey or Jersey).

It is only very recently that a discussion has arisen as to the possibility to use investments in private equity funds for the purpose of covering the technical provisions. The issue has also been debated in connection with previous legislative changes. There where expectations that the governmental committee proposing new investment rules for insurance companies (SOU 2003:84) would discuss the matter and suggest a relief for such investments. However, the committee did not manage to meet these expectations and no proposal was ever submitted in this area. It has also been noted that EU directives concerning insurance are unclear in certain respects, for instance as relates to the relationship between the liquidity requirements and the matching requirements. The question is whether the liquidity requirements always should have the same meaning. To comply with the matching requirements it may be necessary to invest in long term assets to cover a long term liability. Must a long term assets be as liquid as a short term asset? According to information available to us, the EU commission intends to look into this issue and to further consider for example how venture capital investments relate to the liquidity requirement in the EU directives. We may possible expect a statement from the EU commission in this matter.

Irrespective of current legislation and how the applicable EU directives for insurance companies are to be interpreted, the proposal regarding occupational pension insurance will increase the possibility for Swedish life insurers to invest in private equity as an asset class. The new proposal aims to implement into Swedish law the EU directive (2003/41) on the activities and supervision of institutions for occupational retirement provisions. The directive is a result of the work within the EU to harmonise the regulations in the financial area in order to create an inner market for financial services. In the area for occupational pensions there has not previously existed any common legislation within the EU. One of the objectives of the new directive is therefore to enable an effective administration of pension capital. In Sweden the new regulation will cover life insurance companies and mutual societies providing occupational pension insurance and pension foundations that are used to secure pension commitments for at least 100 employees.

The institutions that will be regulated by the proposed legislation will receive entirely new investment rules. For assets covering the technical provisions the general rule will be that the investment shall be made in suitable assets according to the new "Prudent Person Principle". Future investment may be made without observing the detailed investment restrictions in IBA (for example restrictions in relation to certain assets and the liquidity requirement). For the occupational pension insurance business of life insurance companies and mutual societies, the new rules will allow investments up to 30% of the technical provisions on non-regulated markets. Additionally, also derivative instruments may be used for debt coverage purposes.

To sum up, the proposed legislation suggests that the current detailed investment rules that apply in Sweden will be replaced by a general principal of prudence. The committee report specifically mentioned the private equity and venture capital markets as possible markets for future investments. Provided that the proposal leads to changes in the law, considerable amounts may be set free for investments in these markets. According to the report over 700 BSEK of the pension capital was in 2002 managed by life insurance companies and mutual societies. The report is expected to lead to changes of the relevant legislation during 2005.

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