An example of a stand-alone company scheme can be found in the pension fund of steel maker Rautaruuki, which caters for some 6,000 members.
The total value of assets under management is E450m; this consists of an active compulsory part of E370m, and an additional pension scheme with assets of E80m, which was closed to new members in 1987 for cost reasons.
Ilkka Arjaluoto vice president of the fund, explains that the two funds differ little in terms of asset allocation. “The distinction between the two funds is not so much between the asset classes as within them,” he says, and adds: “For example, investment in equities from outside the OECD is not acceptable asset in the compulsory part because of the solvency requirement, but we can take this risk in the additional part. But we are very conservative in both parts.”
Asset allocation in the main compulsory part consists of 52% in bonds, 28% in equities, 9% in real estate, 8% in money market and 3% in alternative investments including hedge funds and venture capital.
In terms of the allocation to equities the fund has defined limits which date back to 1995. The upper limit is 32%, the lower limit 11% and the neutral position 20%. The allocation to equities has increased significantly from the position of 15% last spring; when the stock market was at its lowest the fund was nearly down to its lower limit.
Around half of the equity allocation is domestic. “Finnish industry has limited possibilities which is why we have half in foreign countries,” says Arjaluoto.
Arjaluoto prefers a sectoral approach to equity investing: “We think of industries and economic cycles; at certain times some industries are better investments than others. In the last couple of years has shown that diversifying by country doesn't help at all. If some industry goes down in New York it goes down in every country.”
He adds: “Now because we believe that world economy is improving we have increased cyclical investments.”
The bond portfolio has seen a shift to corporate issuers which now account for 40%; the superior return which they offer is the main reason for the move. Arjaluoto explains that they have proved a better investment, until last year. He adds: “In reality if you have an appropriate policy the risk of corporate bonds is not higher than government bonds.”
The corporate bonds are mainly investment grade: 95% have a minimum rating of triple-B. The remainder is high yield which have been introduced over the last two years.
The allocation to real estate is close to the average for compulsory schemes. Arjaluoto explains that this is not a priority area: “We are not expert in real estate and we have not wanted to build up a specific organisation.”
The portfolio is all direct-held. The fund has considered investing in real estate companies but considers such investments too volatile and their performance more akin to equities.
Where hedge funds are concerned Arjaluoto shares the feeling of others in the industry that present regulation on solvency capital is inadequate. “We need more sophisticated systems,” he says. “In Finland there are too few risk classes. Hedge funds include all kinds of risk so it is not one class.”
He adds: “The regulator does not have enough staff to build up detailed regulations, so the outcome is too rough.”
The present market value of assets is about 20% higher than the liabilities that they cover, so the fund does not have an issue with solvency.
Those responsible for managing the fund meet with their consultants on a quarterly basis to assess the outlook for the fund for the next three months. Reviews of allocation are made on an annual basis and when a decision is made the board decides limits for every instrument.
Arjaluoto explains that that the stand-alone form is preferred to entrusting the company’s pension arrangements to a pension insurance company, in spite of the greater risk associated with doing so. “We have lower administration and management costs and better return on investments,” he says. “Theoretically the world could collapse at any time but in reality it is out of all likelihood that the two years 2001 and 2002 could happen again.”
The principles guiding investment strategy include the maximisation of solvency while minimising risk. The fund also aims to keep contributions stable. On the whole Arjaluoto describes the strategy as “very traditional”. He adds: “we also look to see what kind of philosophy our competitors have.”