Benefits of Contribution: Individual Asset Allocation, Diversification and Welfare in a Defined Contribution Pension System

35 Pages Posted: 15 Mar 2006

See all articles by Anders Karlsson

Anders Karlsson

Stockholm University - Department of Corporate Finance

Lars L. Norden

Stockholm University - Stockholm Business School

Date Written: November 11, 2006

Abstract

We analyse the new Swedish pension system, which constitutes a partial defined contribution plan where individuals can choose from hundreds of mutual funds to invest part of their pension savings, making them bearing part of the investment risks themselves. We perform a factor analysis in order to explore the actual asset classes that are driving the returns of the mutual funds available to individuals. The large amount of mutual funds can be represented with only a few orthogonal factors or distinct asset classes. Moreover, we investigate individuals' asset allocation choices and relate individuals' factor exposures to a number of demographic and socio-economic variables in order to find out who holds what, and whether asset allocation and diversification differ with respect to individual characteristics. We find that sophisticated individuals are more likely be active participants in the pension system and tend to load less on a general index factor and bond factors than less sophisticated individuals. Moreover, we find significant differences in individuals' portfolio performance, the most eye-catching result being that men show better performance than women. We argue that systematic differences in asset allocation and performance might give rise to unwarranted distribution effects in the new pension system.

Keywords: Defined contribution pension plans, Individual investors, Asset allocation, Performance

JEL Classification: G11

Suggested Citation

Karlsson, Anders and Nordén, Lars L., Benefits of Contribution: Individual Asset Allocation, Diversification and Welfare in a Defined Contribution Pension System (November 11, 2006). Available at SSRN: https://ssrn.com/abstract=891164 or http://dx.doi.org/10.2139/ssrn.891164

Anders Karlsson (Contact Author)

Stockholm University - Department of Corporate Finance ( email )

School of Business
SE-106 91 Stockholm
Sweden
+46 8 162180 (Phone)
+46 8 153054 (Fax)

Lars L. Nordén

Stockholm University - Stockholm Business School ( email )

Sweden

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