During 2006 new regulations governing pension investments and solvency rules came into effect, resulting in an increase in equity allocation among pension funds and insurers.
The reforms, first on the benefits side in 2005 and most recently on the investment and solvency side, were largely a result of the proposals from the so-called Puro Commission and have left the industry busy with implementing the changes, says Reijo Vanne, head of research and development at the Finnish Pension Alliance (TELA). “We are now bedding down to see how it all works so there are not any further major changes on the cards,” he adds
According to TELA statistics, private and public funds returned an average 9.3% in 2006, with equities alone accounting for 20.2%. Real estate returned 10.1% whereas fixed income a disappointing 1.3%.
Ilmarinen Mutual returned 8.5% last year on its €23bn portfolio. Contributions by equities, and domestic equities in particular, were strong and only Japanese equities disappointed with a flat performance. In addition private equities performed well. Currency hedging countered the negative effects of a falling dollar. According to the company’s annual report, it invested 45% in bonds, 39% in equities, 5% in real estate, 1% in other debt and securities. Reportedly, Ilmarinen intends to increase its equity allocation by two percentage points per year until 2012.
According to Pension Fennia’s annual report, it also performed well with a 8.3% return. The best yield, as for many other Nordic institutions, came from equities invested in the domestic market and its close neighbours. US and Japanese equities provided the weakest performance. Pensions Fennia has €5.6bn in assets under management.
The asset split at the end of last year was 43.5% in equities, 37.5% in bonds, 11.4% in real estate, 4.3% in loans and 3.3% in other debt securities and deposits. Pension Fennia’s equity portfolio includes listed and unlisted equities as well as derivatives, hedge funds and capital funds.
Investments in listed equities returned 15.8%. At year-end hedge funds accounted for 8.9% of the equity portfolio, returning 6.4%. Fennia’s real estate portfolio returned 15.1%.
The Local Government Pension Institution also performed well with a return of 9.8%. As for the other institutions in the country, equities and private equities outperformed whereas bonds disappointed. Out of its €22bn portfolio LGPI invested 50% in equities, 39% in fixed income, 7% in real estate and 4% in alternatives, mainly in private equities. Approximately 20% is invested in Finland.
The State Pension Fund, with assets of €10.3bn, returned 7%. The fund’s asset split was 55.5% in fixed-income instruments, 40.4% in shares and 4.1% in other investments, which include real estate private equity, infrastructure and absolute return funds, according to its website. The fund received an €1bn cash injection from the Finnish government at the end of last year. Timo Löyttyniemi, managing director of the fund, has publicly stated that the intention is to invest 10% in alternatives within two years, as a result of new money but also a reduction in fixed income assets.
Vanne says that on average, Finnish funds invested 43% in equities, 9% in real estate and the remainder in fixed income. “It is clear that Finnish funds are taking advantage of the new liberalised rules by continuing to allocate more into equities as the buffer-requirements are relaxed. In the autumn of 2006, the average equity holding stood at 37% and by the end of the year it was 43%. Fixed income fell roughly by the same amount.”
Vanne notes that the increase is not only stock price appreciation but also active moves to boost equity proportions in portfolios. “This trend continues and is apparent again this year. At the end of March equity allocation has yet again increased and stood at 46% of total assets. Considering the current market conditions it will be interesting to see what this looks like at year-end.”
Country and regional allocation at the end of last year stood at 29% invested in Finland, 40% in other euro-zone countries and 31% in non-euro-zone countries. Vanne says funds increased their positions into non-euro-zone countries, such as the UK, Sweden and Denmark, from 28% during the year.
The size of the Finnish pension and insurance market was €114.5bn at the end of last year, up from €102.2bn at the end of 2005. Vanne says assets at the end of March 2007 stood at €118.6bn.
During the year the Finnish stockmarket outperformed global benchmarks in line with its Nordic neighbours. “Last year the home bias served institutional investors well but internationalisation of the portfolio continues because of the limited size of the domestic market,” he says.
Vanne adds that within the broad categories of equities and bonds there are alternative investments such as private equity and hedge funds but they are not split out in TELA’s statistics. “Of the 43% invested in equities, 7.2% in allocated to hedge funds and 5.3% to private equity so alternatives still only represent 4-5% of a total portfolio.”
In terms of more exotic alternatives such as forestry and infrastructure, Vanne says that these categories are still small and not separated out. “These are areas where there is a lot of interest and many pension funds and insurers are currently looking into different types of instruments in order to access these asset classes,” he says.
The Puro Commission, a negotiation forum mandated by three Finnish trade unions and the Confederation of Finnish Industries to look into pension matters, was headed by Kari Puro, former chief executive officer of Ilmarinen. He postponed his retirement for five years until last year when he reached the age of 65 and the forum continues under the leadership of Jukka Rantala, CEO of the Finnish Centre for Pensions.
Puro’s late retirement may be seen as an indicator of a general trend of increasing retirement age in Finland. Vanne says that although the average retirement age has not increased much in the past year the tendency is for people to stay at work longer, and that over a 10-year period it is likely to have increased by two years.