Investment Choice in the Swedish Premium Pension Plan

Journal of the European Economic Association Papers and Proceedings, Vol. 5, pp. 636-646, 2007

23 Pages Posted: 22 Jun 2008 Last revised: 11 Jun 2013

See all articles by Marten Palme

Marten Palme

Stockholm University - Department of Economics; IZA Institute of Labor Economics

Annika E. Sundén

Stockholm University - Swedish Institute for Social Research (SOFI)

Paul Söderlind

University of St. Gallen; Centre for Economic Policy Research (CEPR); University of St. Gallen - School of Finance

Date Written: April 1, 2005

Abstract

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."

Suggested Citation

Palme, Marten and Sundén, Annika E. and Söderlind, Paul, Investment Choice in the Swedish Premium Pension Plan (April 1, 2005). Journal of the European Economic Association Papers and Proceedings, Vol. 5, pp. 636-646, 2007, Available at SSRN: https://ssrn.com/abstract=1148968

Marten Palme (Contact Author)

Stockholm University - Department of Economics ( email )

Universitetsvägen 10 A
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IZA Institute of Labor Economics

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Annika E. Sundén

Stockholm University - Swedish Institute for Social Research (SOFI) ( email )

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SE-106 91 Stockholm
Sweden

Paul Söderlind

University of St. Gallen ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41 71 224 7064 (Phone)
+41 71 224 7088 (Fax)

HOME PAGE: http://https://sites.google.com/site/paulsoderlindecon/home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of St. Gallen - School of Finance ( email )

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St.Gallen, CH-9000
Switzerland

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