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Summary
Evaluation of the performance of AP7 management of Premium Spar Fund
and Premium Choice Fund – November 2000 to May 2010
The premium pension system is part of the mandatory Swedish public
pension system implemented in 1999. The yearly contribution rate to the
premium pension system is 2.5 per cent of a wage earner’s salary and
other taxable benefits. The contribution is credited to the individual account
of each participant who is entitled to invest her/his assets in mutual funds.
In 2009 universes of around 800 funds were available, from which a
participant could choose up to five. Participants could change funds without
direct fees, and contributions for those participants who did not make an
active choice were invested in a default fund.
The Premium Savings Fund (PSF), managed by AP7 (an independent
government agency for management of pension assets), was the default
fund until May 2010. Participants that had previously made an active choice
could not choose PSF, although participants could select AP7 to manage
their assets since the
Premium Choice Fund (PCF), run by AP7, was
included in the universe of selectable funds.
PSF and PCF were closed in
May 2010 and the default fund became a life cycle fund.
The board of AP7 have provided guidelines concerning risk and return for
PSF and PCF. The intention was that over consecutive five-year periods the
yearly return for PSF should at least be the same as the yearly return for
the funds that could be chosen in the premium pension system, but with a
lower risk. The yearly return for the PCF should be 0.35 percentage points
higher than returns for the funds that could be chosen in the premium
pension system.
The benchmark for PSF and PCF is thus the funds that could be chosen in
the Premium Pension System. An index named PPM-index was calculated.
(PPM is an acronym for the agency that previously handled the system.)
More than six million individuals have made contributions to the Premium
Pensions System. Approximately 2.5 million of these six million individuals
have never chosen any fund; thus their contributions were invested in the
default fund, PSF. At the beginning of 2010, 40 per cent of the participants
in the premium pension system had paid into the default fund. The market
value of the default fund at that time was approximately SEK 90 billion,
which amounts to 25 per cent of the total asset value of the Premium
Pensions System. Consequently, an evaluation of portfolio performance of
the PVF is also an evaluation of risk and return for those participants that
have never chosen a fund or funds in the Premium Pensions System.
An evaluation of five consecutive five-year periods between 2001 and May
2010 show that PSF had a higher return and lower risk than benchmark for
the first two periods (2001-05 and 2002-06); both lower return and lower
risk for the two following periods (2003-07 and 2004-08); and lower return
and higher risk for the last period (2005-10). The return for PCF was lower
than was stipulated by the guidelines for all five periods.
Statistical tests on monthly observations between 2000 and May 2010 were
run to investigate whether the risk premium (subtracting risk-free return
from return from the fund) for PSF and PCF were statistically significantly
