FINLAND -  Tela, The Finnish Pension Alliance, said Finnish pension funds are preparing for the arrival of new proposals to relax solvency regulations, which should be implemented in the coming weeks.

Matti Leppälä, director of international and legal affairs in the Finnish Pension Alliance, Tela, told IPE he expects the government to press for the quick implementation of the legislative proposals that were handed to the government on Friday and which are currently being discussed in parliament.

The proposed bill is complex and covers a number of area's of the Finnish solvency framework, Leppälä explained.

One part of the change means pension funds will be allowed to tap into certain excess buffers and use part of the money as operating capital, to boost risk buffer of the fund.

The proposals state anything above the minimum required level of the equalisation reserve - the funded buffer intended as an equalisation for the funds in the Pay-As-You-Go (PAYG) part of the pension system - can be temporarily transferred from the liabilities to the operating capital.

Secondly, pension funds will be allowed to tap into the EMU buffers, set up when Finland joined the Economic and Monetary Union (EMU) to anticipate labour market fluctuations, and use part of the reserves to increase their investment risk capabilities.

These new regulation should also increase pension funds' equity risk-taking capabilities, by making some changes to last year's investment reforms, said Leppälä.

Under the Finnish system, a function of average solvency is calculated twice a year. When this ratio goes up, the calculated interest rate common for all institutions -  currently 4.75% - goes up as well, and vice versa.

The so-called equity linked buffers also play a role as 10% of the calculated interest rate is linked to average return of quoted equity investments of all institutions.

"The idea is that the system as a whole is able to take more investment risk in equities, this way the risk is shared by the system as whole," explained Leppälä.

"The equity-linked buffer is part of the liabilities, and it moves so that it can decrease liabilities by the maximum of 10% and increase them by a maximum of 5%," he added.

If the equity investments go down, using the buffer can decrease the liabilities, and it is the entire system which buffers this equity risk since it calculates the average equity investments in listed equities for the pension system as a whole.

It was decided last year that the buffer zone, currently at 4%, would be increased by 2% every year, but under the new plans the buffer would immediately increase to 10% to diminish pension funds' liabilities and improve solvency.

Lastly, the funded liabilities are increased by the calculated interest rate, which will be diminished to 3%, so that the increase in the liabilities will only be 3% - without this measure liabilities would grow by 4.75%.

Leppälä expects these changes to be implemented in the next few weeks and stay in place until the end of 2010.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

Topics