Commodities to Solve for the Swedish Pension Fund Deficit

Abstract: Currently there is a deficit in the unfunded Swedish pension system that according to forecast will remain for a steady future. The Swedish pension (AP) funds act as buffer funds and thereby have the mission of covering this deficit. Therefore, it is crucial that the targets of the AP funds are met. Currently that is not the case. Our conjecture states that one of the limiting factors for achieving their targets is the current AP fund regulation, which prohibits investments in commodities. By analyzing the effects of adding commodities to the portfolio, our goal is to conclude if this, in retrospect, would have been advantageous, and if this will be beneficial for the future. An AP portfolio was synthetically replicated, followed by a flexible model, which enabled the simulation of new AP portfolios including commodity exposure. All commodity indices added in this study proved to increase return and lower the risk in the AP portfolio. Our conclusion is that, in order to make it possible for the AP funds to fulfill their goals, the regulation should be changed to allow for commodity investing.