money-weighted average of time during the working career of participants plus the moneyweighted average time in retirement before the unit of contributions has to be paid out as a pension benefit. For Sweden, this time is estimated to be around 32 years.<sup>25</sup> Seen in this perspective, it would be wrong for funds not to hold a large share of equities, since the duration of time until a unit of contributions has to be paid out is so long. This way of looking at things justifies a large equity content in insurance company portfolios.

Since a large proportion of the assets in Swedish insurance portfolios is invested in equities, volatility of asset values is higher than it would be with a larger share of interest bearing assets. On the other hand, historically, Swedish government bonds have had a return of around 3 percent compared with a return of 8 percent for equities listed on the Swedish Stock Exchange (Frennberg and Hansson 1995). Hence, the historical data indicate that it is to the advantage of plan participants to have as large an equity component in insurance portfolios as possible.

The Swedish law regulating investments of insurance companies is designed to be cautious for the basic commitments of the plan – the guaranteed benefits – but to leave freedom for investments for the remainder of assets. In principle, providers are obliged to pay the guaranteed benefits they have promised. In addition, companies can provide higher bonusadjusted benefits when asset portfolios perform well – but if the ratio of assets to pension liabilities threatens to fall below unity - or does so – insurance providers must reduce the bonus in order to bring the asset-liability ratio back to a level greater than unity. In this framework, which is the normal framework for private individual voluntary insurance in Sweden, the insurance provider bears the risk for meeting the guarantee level of benefits. There is no risk involved per se in the bonus, however, other than an image risk if the company must cancel part of a previously announced bonus. Insurers bear the investment and longevity risks of the guaranteed benefits, but these risks are shared among annuitants in the case of bonuses.

In DC schemes of unit-linked type, the individual bears the entire investment risk during the accumulation phase. In addition, if the capital of the deceased during the accumulation period is simply inherited by specified survivors, neither is there a longevity risk for the insurer during this phase. With DC the insurer’s period of uncertainty regarding the investment and longevity risks is, then, the much shorter annuity period. From this point, however, the risks for the insurance provider are ostensibly the same for DC and DB. The difference is that in DB a promise will usually have been made to the participant several decades earlier when he/she became a new entrant. Hence, whereas the insurer’s hands are not bound in DC at the point of granting the annuity, they are bound by a contractual agreement made early in the worker’s career in DB.

The guarantee-bonus system does not alter the risks. What it does do is to provide a flexible framework for managing them. The guarantee is a commitment to be fulfilled, while the outcomes for investments and mortality contribute to determining the bonus. The “bonus” provides the insurer with extra degrees of freedom. It is a convenient mechanism for absorbing miscalculations in longevity and for letting the overall result reflect the development of the market. The more risk-averse insurer will, thus, set a conservative guarantee and hope to compensate with a generous bonus. In a not-for profit setting the distribution between the guarantee and the bonus may be more of theoretical interest if all

> 25 This is based on estimates performed for the NDC scheme, given current labor market and retirement patterns.

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