The Swedes rely on a state fund for old-age provision. The model is also interesting for German savers. By Andreas Hohenadl, Euro am Sonntag
B.When it comes to Swedish bestsellers, most people in this country think of do-it-yourself furniture or Abba albums. The list must urgently be expanded to include the abbreviation AP7. AP7 stands for “Sjunde Allmänna Pensionsfonden”, the seventh general pension fund. This is where the state administers its citizens’ pension assets.
That doesn’t sound very exciting at first. But the “AP7 Aktiefond” portfolio has grown to such an extent that in August it moved to number 1 among the largest funds in Europe. As figures from the analysis company Morningstar show, the “Sweden pension” just squeezed out the previous leader, the pension fund Pimco GIS Income. Its assets stood at 57.72 billion euros at the end of August, while the AP7 share fund brought in 57.80 billion euros.
“A combination of two factors brought the fund to the top: a fantastic performance and steady inflows,” writes Morningstar analyst Ali Masarwah. The government-managed equity portfolio is an important part of Sweden’s pension system. It has a similar structure to the German one and is based on three pillars: the statutory old-age pension, the company pension and an optional private pension.
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The Swedes pay a pension insurance contribution of 18.5 percent of gross wages, of which 16 percent goes into the pay-as-you-go pension. But 2.5 percent migrate to a capital-based pension. Citizens are free to choose: a total of a few hundred pension funds from providers such as Fidelity or Blackrock are available.
However, many Swedes save themselves the agony of choice and then automatically end up with their contributions in an AP7 fund. There are two of them: the equity fund mentioned and a bond portfolio. The equity fund forms the core. Up to the age of 55, 100 percent of the contribution earmarked for capital coverage flows into this portfolio. Thereafter, the fund will gradually switch to the bond fund, which invests conservatively in Swedish bonds with good credit ratings.
Comfortable and good
Anyone who, as a Swede, chooses the easy way and has their money managed by the state, doesn’t do much wrong. On the contrary. “In the long term, the AP7 stock fund is one of the best global equity funds on the European fund market,” says Morningstar expert Masarwah. Over the past ten years, the fund achieved an average increase of 14.7 percent per year. The only disadvantage: As a non-Swede you have no chance of investing in the portfolio. But you can at least learn a few things from the Scandinavian pension model for your own provision.
First of all, there is the clear conviction that only with the help of the stock markets can an attractive additional income be generated in addition to the pay-as-you-go pension. The Swedes do not even try to eliminate the risks of this type of investment, as the Germans do with expensive guarantee promises in old-age provision. On the contrary: The AP7 share fund goes to work in a sporty way.
It is true that he invests almost exclusively passively in the global stock market. But he mixes in a few percent private equity investments – and works with leverage. By using derivatives, he can increase his investment rate – to typically 135 percent. “In upward markets, it is regularly among the top ten percent of the funds in the category,” said Masarwah.
Some funds from private providers also offer this kind of turbo. You leverage the performance with the help of long / short strategies: Disproportionately high investments are made in particularly promising companies, while the fund relies on price declines in weak companies. This procedure requires a lot of experience. Funds like FAST Europe or Threadneedle Global Extended Alpha (see below) have proven in the past that they can generate excess returns.
From the Swedish model, however, one can also learn to step off the gas early and shift money into more defensive investments when retirement approaches. So-called lifecycle funds, which are offered by companies such as Allianz GI, Deka and Fidelity, offer such a reallocation mechanism. From the large number of products, the table lists those that manage the money for retirement around 2040.
Sporty Sweden pension:With a passive, global investment strategy and a leveraged investment ratio, the AP7 equity fund clearly outperforms the MSCI All Country World index.
Image source: Finanz Verlag