The global financial crisis has sparked a review of Finnish pension reforms. Reeta Paakkinen reports
The Finnish social affairs and health ministry has announced it is to set up a working group to discuss the reform of investment and supervisory regulations for local pension institutions. It has also proposed that the current investment regulations be temporary relaxed to enable funds to maintain a healthy solvency level during the global financial crisis.
Social affairs and health minister Liisa Hyssälä, who announced the launch of the group on 6 October, says the main reason behind the decisions was the current crisis in global financial markets. Hyssälä made the announcement at the pension forum, a platform established in March to bring together a broad representation of bodies that decide on, implement and assess Finnish pensions policy.
“Finnish pension assets are invested to global markets in addition to Finland,” says Hyssälä. “So far the average return [from pension fund invest-ments]corresponds to expectations. At the moment we have no reason to doubt pension assets would not be invested in a profitable and secure manner. However, due to the current uncertain economic situation we must pay extra attention to the management and supervision of pension investments. The fact that investment vehicles have become more complex also means better supervision is required.”
The temporary relaxation of investment regulations is intended to strengthen solvency at Finnish funds by bringing forward to 2008 from 2012 the date of increasing equity-indexed technical reserves to 10%, transferring only 3%, the fund interest rate, to pension funds in 2008, and using the so-called EMU buffer funds to temporarily support solvency levels.
According to Hyssälä, the time is now ripe for evaluating the existing regulations in the light of the experiences that local funds have gathered since the latest reform. “At the same time there is a need to reassess how the work pension system could promote employment in Finland. The current global financial crisis and its effects to our pension system should naturally also form a part of the assessment.”
Finland introduced new investment regulations for pension investors in January 2007. Based on recommendations by a committee of employer and trade union representatives chaired by former Ilmarinen CEO Kari Puro, it included an increase of the cap on equity investments to 35% of a port-folio from 25%, with the level being allowed to rise by two percentage points a year over five years, and relaxing the rules on alternative investments. The regulations also expanded the possibilities of investing in non euro-zone assets.
Tarmo Pukkila, director general of the ministry of social affairs and health’s insurance department, says the details of the working group and its schedule will be decided by mid-November. “The members of the group will include the leading investors in Finland,” he says. “Although the new regulations were launched not so long ago the current radical changes in the markets give a good reason to be alert.”
However, Antti Koura, head of investments at Veritas mutual pension insurance, which has €1.84bn under management, says the current rules do not necessarily need updating. “We all know the current regulations are too simple to reflect accurately the reality of financial markets - meaning they cannot be applied in a blind fashion but must be used together with other qualitative and quantitative tools in risk management,” he says. “But this does not mean that we should consider these rules as fixed and not subject to revision. We should always be ready to learn from history and adjust our theories to reflect new information.”
Matti Leppälä, director of international and legal affairs at the Finnish Pensions Alliance (TELA), hopes the working group will evaluate the current regulations as a whole and avoid the pressure to call for tighter regulations simply to echo the general atmosphere. “It is positive that the ministry has decided to assess how well the recent reform works in practice,” he says. “In the current volatile environment it is important to be able to react rapidly.”
Leppälä notes that in June the insurance supervisory authority published a report on the impact of the reform. “[It] focused way too much on hedge funds and thus did not give an accurate picture of the situation as a whole,” he says. “As such it did not evaluate thoroughly enough the reform of 2007 and its impact. Hopefully the new work group will adopt a wider perspective.”
In Leppälä’s view, the current regulations are functioning well even in the current market situation. “It would be good if in the future funds could take more risks, which would enable them to increase their allocations when there was an upturn in market conditions,” he says. “We hope funds will have more room to operate so that in bad times they would not have to start selling their assets like short-term investors.”
No comments yet