Living on the bright side of retirement An analysis of fund types and fund categories in the Swedish premium pension system

Abstract

This study investigates the Swedish premium pension system, where individuals can either choose their own premium pension funds or have their money placed in a preselected option. Many Swedes find the pension system complex and are unaware of their choices. The purpose of this study is to determine if it is possible to optimize the premium pension returns by selecting specific fund types or fund categories. Analyzing data from the past decade, the study examines the performance of funds offered by the premium pension authorities, which include four fund types and 35 underlying categories. Using regression analysis, the study tests hypotheses regarding significant differences in risk-adjusted returns between the different fund types and fund categories. The results indicate that equity and generational funds significantly increase Jensen’s alpha compared to fixed-income funds, and all fund types show significant improvements in both the Sharpe and Treynor ratio over fixedincome funds. Among the fund types, equity funds in general achieves the highest risk-adjusted performance across all three metrics. The findings underscore the importance of equity exposure for achieving higher risk-adjusted returns, especially over a longer investment horizon. However, no single fund category is consistently superior across all metrics, suggesting that fund category alone does not provide significant predictive value. Therefore, evaluating each premium pension fund based on its individual merits, considering fund characteristics, diversification, and changing risk profiles as investors approach retirement, still remains essential for optimal premium pension fund allocation. Future research could extend the analysis to longer periods, incorporate additional variables, or evaluate the performance of individual funds, aiming to identify the optimal fund portfolio for premium pension savings.