The old-age pension system in Sweden is made up of three components – the national retirement pension system, supplementary occupational pension and voluntary private pension savings. The AP funds are part of the national retirement pension system, which will be discussed exclusively in this section.
The national pension system
A widely supported parliamentary decision in 1999 led to the reform of the Swedish national pension system. In connection with the reform, the AP funds were reorganized and given new mission directives and investment rules with effect from 1 January 2001. The task of the AP funds is to maximize long-term return, with a low level of risk, for the benefit of those insured in the retirement pension system.
The national pension system (excl. guarantee pension) is completely autonomous from the national budget and is divided into two tiers, a pay-as-you-go component where the paid-in pension contributions are used to finance current income pension benefits and a fully funded system where pension disbursements are based on individual savings invested in PPM funds. Both are financed by contributions representing 18.5 percent of the employees’ gross salary and other taxable benefits that are paid in by the employer each month. Most of the pension contributions that are paid in, 16.0 percent of the 18.5%, go to the income pension system to which Första AP-fonden belongs. This means that the Fund manages pension capital on behalf of every person who is, or has ever been, employed in Sweden.
Första AP-fonden — a buffer in the income pension system
The income pension system is a so-called pay-as-you-go system in which the pension contributions that are paid in every month are used to finance income pension disbursements to those who are already retired. In 2008 pension contributions marginally exceeded pension disbursements, but as of 2009 and for many years into the future, disbursements will exceed contributions due to an increased number of pensioners when the post-war generation retires. However, this effect was taken into consideration when the income pension system was designed. Five buffer funds, the First, Second, Third, Fourth and Sixth National Pension Funds, were created to manage the surplus that was previously found in the system with the intention of using their returns and assets for payment of pensions during periods with a deficit.
The income pension system has a built-in mechanism that prevents pension disbursements from exceeding the system’s long-term capacity, so-called automatic balancing. If the assets of the pension system fall below its liabilities, the balance mechanism is activated. Read more about the effects of balancing on the pension system in the following section.
Return — no industrial or economic influence
The First to Fourth AP funds (AP1-AP4) have a common mission and operate on mutually competitive terms. Their mandate is regulated by the Swedish National Pension Funds Act (2000:192192), which states that “the mission [of the AP funds], given a low risk level, is to maximize long-term return for the benefit of those insured in the retirement pension system.” (Chapter 4, section 1).
Preparatory work to the act also states that “management of the funds shall not be influenced by prevailing government policies, whether industrial or economic. Consideration shall be given to ethics and the environment without compromising the overall goal of attaining a high return.” (Government bill 1999/2000:46 The AP Funds in the Reformed Pension System, section 7.1).
In addition, the act contains rules stipulating how the assets of the funds may be invested. The investment rules are flexible and allow the funds to invest in several different asset classes, although not commodities (see table Investment rules in section The pension system demands high returns).
The Sixth AP fund (AP6) is an additional buffer fund in the pension system but has a different role; to invest venture capital in small to mid-sized Swedish growth companies as a means for promoting the development of Swedish business.
The performance of the AP funds is evaluated yearly by the Swedish government and the results are presented in a communication to the Swedish parliament (Riksdag) .
Structure of the Swedish pension system (excluding guarantee pension)
component that provides premium pension benefits. Första AP-fonden, like the four other AP funds, is part of the income pension component.
