Risks and risk levels are authorised in accordance with the Swedish National Pension Funds Act and under the restrictions imposed by the Board of Directors and internal limits set by the CEO. AP3 has a Risk Control department to ensure compliance with the approved risk framework.

Definitions of risk
Risk can be defined as the possibility of a projected scenario giving rise to a negative outcome. Our mandate is to generate maximum possible benefit for the pension system by managing our fund capital so as to deliver strong investment returns at a low level of risk. Risk management entails assessing, analysing, calculating and managing risk to achieve maximum returns at the chosen level of risk. The Risk Control department has the task of identifying, measuring, analysing and monitoring risks to ensure that the Fund’s risk taking is controlled and within the established framework.

Market risk
Market risk is the risk that the value of an asset may fall due to changes in asset prices on the financial markets. We manage market risk actively in order to optimise our exposure in relation to projected returns. The Board of Directors delegates risk mandates to the CEO that may be further delegated to specific asset managers.

Credit risk
Credit risk is the risk of incurring a loss due to the failure of a borrower or counterparty to meet repayment obligations. In a securities context, issuer risk is the risk that the borrower cannot fulfil his repayment obligations on the due date. As with market risk, AP3 manages credit risk as part of its day-to-day asset management. Counterparty and settlement risk relate primarily to the risk of a counterparty failing to meet obligations relating to derivative and foreign exchange contracts. These can be seen as residual risks, meaning that they are part of the business but do not contribute actively to returns. Our aim is to restrict them to a reasonable level at a reasonable cost.

Operating and regulatory risk
Operating and regulatory risk are also classified as residual risks and here our aim is also to keep them to a reasonable level at a reasonable cost. Operating risk is the risk of incurring losses due to internal factors, such as errors in systems and models, mistakes and fraud, and external factors, such as crime and extreme events. Regulatory risk is similar to operating risk and arises in relation to non-compliance with statutory requirements and regulations, the failure of legal contracts to provide intended protection and the potential damage of rumor and hearsay to the Fund’s reputation. We manage these risks by continuously monitoring procedures and processes and maintaining a high level of awareness throughout the organisation.

Risk measurement
AP3’s middle office is in charge of independent risk control and monitors market and credit risk on a daily basis. It quantifies aggregate risk across the Fund’s operations and also measures risk for individual asset management mandates. In the market-listed portfolio, the focus is on relative risk – deviations from benchmark indices – whereas we use absolute risk for our other portfolios and for the Fund as a whole. Risk limits are set using position limits and past and future statistical measures such as tracking error and value at risk. Value at risk is also used to measure our total risk across different risk classes. For further analysis we also use other models, including sensitivity analysis and stress tests.