Smaller corporate pension funds in Finland outperformed their larger peers by 6.7% over the 10-year period between 2004 and 2014, according to a recent study.

Finnish consultancy Esko Advisors – which conducted the research together with Jari Käppi, associate professor of finance at the International Business School Suzhou – said the 0.6% per annum outperformance ran counter to the commonly accepted benefits of scale for pension funds. 

Petri Kuusisto, chief executive at Esko, said the figures showed that companies with their own schemes saved more than 10% on their pension costs compared with larger players.

“This benefit, derived from the investment performance difference and lower administration costs, is substantial and shows no scale benefits for larger players,” he said.

He rejected that allocation alone could explain the difference in performance, as both the large mutual pension insurers and corporate pension funds use a “fair amount” of external services.

“Mutually owned organisations,” he said, “are basically independent, but inside the organisations there is fierce competition among investment units and portfolio managers, which leads to shorter-term performance objectives and more intensive tactical allocations.

“On the contrary, corporate funds seem to have longer-term objectives, and they rely more on strategic allocations than tactical ones – this seems to be the main explanation why smaller ones perform better.”

With a view to cutting costs, companies in Finland have outsourced or transferred approximately 95% of pension fund assets to large mutual pension insurers.

Companies in the country with more than 300 employees are required by law to use large mutually owned pension insurers or set up their own pension funds. 

All pension entities are jointly responsible for the pensions.

Additionally, the pension system is set up as partially funded on an ongoing basis, which means that those employers arranging their pensions via their own schemes carry mainly operational implementation risks compared with the defined benefit schemes found elsewhere in Europe, where longevity, mortality and interest rates dominate risk scenarios.