Investment choice in the Swedish Premium Pension plan

Palme

Mårten

Palme, Mårten

Author

Sunden

Annika

Sunden, Annika

Author

Söderlind

Paul

Söderlind, Paul

Author

text

working paper

Chestnut Hill, Mass. Center for Retirement Research at Boston College20052005monographic

Chestnut Hill, Mass.

Center for Retirement Research at Boston College

2005

monographic

Englisheng

English

eng

electronicapplication/pdfborn digital

electronic

application/pdf

born digital

In 1998, Sweden passed a pension reform that introduced a second tier of mandatory individual accounts, the Premium Pension, in the public system. Of the total contribution rate of 18.5 percent, 2.5 percentage points go to the accounts. The first investment selections in the Premium Pension plan took place in the fall of 2000 when all Swedes born after 1938 were able to choose how to invest their contributions from a menu of about 650 mutual funds. Approximately 70 percent of participants made an "active choice" while the remaining participants' contributions were invested in a government-run default fund.

This paper examines investment choice in the Swedish individual account scheme. First, do workers with high risk in their human capital diversify their overall portfolio by investing their pension funds in low-risk funds? Second, to what extent do participants exhibit "home bias" and invest their pension funds in Swedish assets?

The results show a positive relationship between income and the level of risk in the portfolio. But, looking into the details, the relationship is actually somewhat U-shaped: low-income investors take on more risk than middle-income earners. It also seems as if women who qualify for the guarantee benefit (low-income earners) take on more risk than motivated by their situation. We also find that workers in the manufacturing sector - that is, the sector that is probably most correlated with the Swedish stock market - are less likely to invest in foreign assets and thus are exhibiting "home bias."

Mårten Palme, Annika Sunden, and Paul Söderlind.

CRR WP2005-6

CRR WP

2005-6

http://crr.bc.edu/images/stories/Working_Papers/wp_2005-06.pdf

MChBEnglisheng

MChB

Englisheng

English

eng