The environment and ethics are to be taken into account without diminishing the goal for maximum returns. The AP Funds’ operations are regulated by The National Pension Insurance Funds (the AP Funds) Act (Lag (2000:192) om allmänna pensionsfonder (AP-fonder)). According to this law, the AP Funds’ boards and operations shall not be steered by government directives or by business policy or economic policy interests.
A unique national pension system
Sweden has a unique pension system that has attracted interest from around the world because it is generation-neutral and funded over time. The foundation of the pension system is the national pension, which consists of income pension and premium pension. Income pension is a pay-as-you-go system where the year’s pension contributions paid by the actively working population are used to pay pensioners the same year. Premium pension is a separate part of the national pension where earned contributions are saved in the individuals’ own names. Pension savers have a say themselves in which funds their money will be invested in, and AP7 is the default alternative. As a supplement to this, many actively working people are entitled to an occupational pension through their employers, and private savings are also common.
Bridging the generation gap
From 2009 through 2017, AP1, AP2, AP3 and AP4 each paid out SEK 44 billion to the Sweden’s national pension system. These payments from the AP Funds have been made in response to demographic factors, such as the large number of people born during the 1940s who are now pensioners. Consequently, people who are actively working today are paying in less money to the system than what pensioners are receiving in pension benefits. The difference is covered by AP1, AP2, AP3 and AP4. The pension system has been designed specifically for this purpose. From 2009 through approximately 2040, paid-out pensions are expected to exceed paid-in contributions. During most of this time, the returns generated by the AP Funds are expected to cover the deficit that arises.
The pension system’s strength affects pensions
The pension system’s strength is measured as the system’s assets in relation to its pension obligations. If the pension system’s liabilities become larger than its assets, an automatic balancing is activated. As a result of this balancing, income pensions will be lower as long as the system’s assets are lower than the pension obligations. Such was the case in 2010, and it will take until 2018 before the reduction in pensions carried out in 2010 will be recovered.
The favourable returns generated by the AP Funds and the increase in the AP Funds as a share of the pension system’s assets from 10 % upon their inception in 2001 to 15 % at year-end 2016 have contributed to the recovery of the pension system’s strength.