Sweden’s largest pension fund AP7, which provides the default option in the country’s defined contribution premium pension system, declared a narrow victory over the system’s private providers in the 2021 race for the highest return – but a more decisive win over the last 22 years.
In its annual report published on Friday the state-run pension fund posted a 31.5% return for the average saver with its Såfa lifecycle pensions product in 2021, up from the 4.4% 2020 return. AP7 revealed some of its 2021 figures a month ago.
AP7 said: “In the same period, the average return for private premium-pension funds was 27.1%.”
However, in 2020, the geared Såfa product only returned around half the percentage gain made by private funds offered on the first-pillar system’s funds marketplace platform.
AP7 said in its report that the difference between the return its default option produced last year, and the average generated by private providers, was down to factors including Såfa’s higher currency exposure, but also said that “developments in AP7’s investments in private equity and risk premia have made a positive contribution.”
In addition, the Stockholm-based institution said that investment risk – as measured as standard deviation during the last 24-month period – had been 16.0% for AP7 Såfa, compared to 13.9% for the average of the private premium pension funds.
The higher level of risk for the state-operated default fund was largely because, AP7 said, its proportion of savers over 55 was still small so the proportion of the bond fund included in the product was also small.
Looking longer term, the pension fund said that from the beginning of autumn 2000 to the end of 2021, the default option had made an average annual return of 8.2% compared to 5.8% for the privately-run pension funds.
The equity fund made a 34% gain during 2021, while the smaller fixed income fund fell in value by 0.7%, AP7 reported.
Richard Gröttheim, AP7’s chief executive officer, said in the annual report that the development of the institution’s two building-block funds behind its Såfa lifecycle pensions product in 2021 reflected the financial markets.
The equity fund gain and the loss on the bond fund had been “completely in line with a world with low interest rates and high values on stock exchanges worldwide,” he said.
“It is difficult to predict the development of the markets in the short as well as the medium-term, but nevertheless, I am convinced of the value of the basis of our strategy: long-term, low fees and diversification,” the CEO said.
AP7’s overall assets grew to SEK966.9bn (€91.3bn) at the end of 2021, from SEK722.5bn a year before, according to the report, with the equity fund holding SEK879.0bn and the bond fund with SEK87.8bn at the end of last year.