The recent scandal at Keva ushered in new governance rules for Finnish pensions mutuals, but Gail Moss finds that many funds are already one step ahead of the game
New governance rules for Finnish pensions mutuals took effect on 1 January 2015. But they are very unlikely to cause much upheaval in the sector, say experts, because many companies have already put their own measures in place. The rules were brought in following the scandal at Keva, Finland’s largest pension fund, which covers local government employees. At the end of 2013, Keva’s managing director resigned after media stories suggested she had charged personal expenses to the pension fund and committed tax fraud.
At a glance
- New rules on transparency and conflict of interest for Finnish pensions mutuals have taken effect.
- Insider rules take effect on 1 June.
- Similar rules are being prepared for public sector funds Keva and VER.
The new rules now require boards of pensions mutuals to establish written guidelines for corporate governance and to identify and prevent possible conflicts of interest. Chief executives, board members and employees may still sit on the boards of other companies, but these and other positions of trust must be publicly registered. They should, however, remove themselves from board negotiations if the other company could benefit. In addition, the pensions mutual’s board has to review this involvement, and the reasons why membership of the board of an outside organisation is necessary.
Also, all transactions between beneficiaries, including board members and the pensions company itself must also be publicly registered.
The law provides for rules on compensation – salaries, pension contributions and the like – although no numerical guidelines have been set. It says compensation must be in line with the statutory and social security objectives and purpose of the statutory pension scheme. And it revises and updates rules on risk control, compliance and internal monitoring, largely because of Solvency II-related changes in insurance legislation.
New insider rules will also take effect on 1 June 2015. The five-month transitional period was granted to enable technical changes to be made, as they had to be implemented at a day-to-day operational investment level.
All pensions mutuals already had some insider rules in place, but the concept of a ‘closely associated person’ (lähipiiriläinen) has now been added to the Act, in addition to ‘insider’. Chief executives and directors, together with ‘closely associated persons’ – individuals with direct authority and/or influence on the company’s administration, such as executive and supervisory board members, auditors and anyone else in a similar position – must record their stock holdings and securities transactions of more than €5,000, as well as those on behalf of their children, in a public register.
“The rules will be effective but it should be noted that pensions mutuals had most of the new requirements already in place, if not precisely in the form required by the revised Act,” says Ilkka Geitlin, legal counsel at Finnish pension fund alliance TELA. “For instance, many of the items to be recorded in a public register were regularly filed to the financial supervisor. So compliance with the new rules will be fairly easy, although of course some work must be done when preparing the new registers and ensuring they are constantly updated.”
Ilmarinen says it made preparations for the new law throughout 2014. “The new law increases the tasks of the board of directors and tasks related to documentation, reporting and control, and organising insider control,” says Leena Siirala, general counsel for legal affairs. “Ilmarinen’s ways of working have, for the most part, already been in line with the new regulations, but existing documents and the code of conduct required some updating. We are also preparing to put into practice measures related to insider control as of 1 June 2015.”
Meanwhile, Etera says the impact on it was minor, as its internal rules essentially complied with the new regulations. And it says it considers that governance in the Finnish pension system adheres to a high international standard. Eric Zwickel, a senior investment consultant at Towers Watson based in London, says: “The rules are formalising what was working practice anyway. In any case, the calibre of professionals working within Finnish pension insurers is very high. The disclosure of stock holdings and board memberships doesn’t look likely to hamper the ability to carry out business, unlike, say, the Alternative Investment Fund Managers Directive.”
Towers Watson’s view is that for pension boards to deal with very complex techniques, they need more breadth and depth of knowledge than 20 years ago, when there were fewer investment options. “Now, the current low yields mean they are compelled to look at a broader set of assets,” says Zwickel. “In addition, we would also like to see provision for non-executive directors on boards to strengthen governance.”
Paradoxically, however, the new rules apply only to pensions mutuals such as Ilmarinen, Etera, Varma, Elo and Veritas – regulated by the Ministry of Social Affairs and Health – and not to Keva itself, which is regulated by the Ministry of Finance. Zwickel says the rules do not seem to address the Keva scandal directly.
“It’s about ensuring transparency, not individual expenses claims,” he says. “However, there’s nothing to lose by putting in place measures that enhance transparency. It was Keva’s activities that got the public questioning trust in pension funds, and these new mechanisms should show that trust is warranted, especially concerning conflicts of interest for board members.”
Similar governance rules are being drafted by the Ministry of Finance to cover Keva and the state pension fund VER, which are expected to take effect later this year or in the spring of 2016.
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