AP3s role in the pension system

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AP3s role in the pension system

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AP3s role in the pension system

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AP3s role in the pension system

The First-Fourth AP funds (AP1-AP4) are part of the national pension system. The funds’ mission is to generate maximum possible benefit for the system by managing their fund capital so as to deliver strong investment returns at a low level of risk.

The AP funds have two different roles within the pension system. First, they act as a buffer by using their capital to fund future pension payments. Second, they generate investment returns that help to finance the system over the long term.

Long-term mandate
In 2000, parliament established anew mandate and investment rules for the national pension funds (also known as the AP funds). The new rules, which came into force on 1 January 2001, mandate the AP funds to manage their fund capital so as to generate the maximum possible benefit for the national pension system through strong returns on investment at a low level of risk. Besides acting as a buffer to cover future pension liabilities, the AP funds generate returns that help maintain a balance between pension system assets and liabilities.

Some basic knowledge of the Swedish pension system is needed to understand how this works. Read more about the Swedish pensions system in the annual reports of the Swedish pension system. These reports are published by the Swedish Pension Agency>>

The AP Funds are regulated by the Swedish National Pension Fund Act (2000:192) >>

How does the Swedish state pension system work?
The Swedish pension system has three main components: general state pension, occupational pension and voluntary private pension. The state pension system comprises an income pension and premium pension.

Every month, 18.5% of an employee’s pension entitled salary is paid into the system, with 16 percentage points going to the income pension and 2.5 percentage points to the premium pension.

The income pension is a standalone system independent from central government finances and is a pay-as-you-go scheme, meaning that pension benefits are paid directly from current workers’ contributions.

What determines the size of the state pension?
The size of an income pension is related to the pensioner’s lifelong income and depends on the number of pension entitlements that he or she has amassed. Pension credits are indexed upwards annually in line with wage growth based on the so-called income index to ensure that pensioners’ living standards remain in line with those of Swedes in general. The size of the premium pension depends on the securities funds that the pension assets are invested in. Each individual can decide how to invest his or her money. If no active choice is made the assets are transferred by default to management by AP7.

People with no or low incomes receive a guarantee pension that is financed via the central government budget and is thus independent from the income and premium pension system.

What is AP3’s role as a buffer fund for the pension system?
AP3, together with AP1, AP2, AP4 and AP6, is one of the national pension system’s five buffer funds. The funds are there to manage the surpluses and deficits that arise between paid-in pension contributions and pension disbursements.

What happens if the pension system is not in balance?
The buffer funds also contribute to the long-term strength of the pension system. The system is financed from two sources: the assets held by the buffer funds (accounting for around 10% of total pension system assets) and pension assets (the remaining 90%).

Pension assets are the value of future pension fees. Pension liabilities are aggregate pension entitlements and rise in line with increases in average incomes in Sweden. The income pension system has a built-in “automatic balancing” mechanism to guarantee the overall financial stability of the system. Automatic balancing ensures that paid-out pensions do not exceed the system’s long-term financial resources. The mechanism is activated if pension liabilities exceed pension assets.