Finnish funds report negative returns in H1

FINLAND - The €28.6bn Varma Mutual Pension Insurance Company, the largest private sector pension provider in Finland, has reported a negative return on investments of -3.8% in the first half of 2008.

Tapiola Mutual Pension Insurance, part of the Tapiola group of financial services companies, also reported a negative return of -3.7% in the first six months of the year, as both pension funds blamed the poor results on difficult investment market conditions.

Varma said the fair value return on investments for the period was -€1.1bn, as the negative return on invested capital was -3.8% compared to a positive 6% in 2007, although the fund claimed the average return over the past five years remains at around 7%.

However, while the number of employees and self-employed people insured by the fund increased by 17,000 - with 5,600 new policies written in the first six months of the year - poor investment returns saw a total result of -€1.6bn for the first half of 2008, of which €1.2bn was lost in the first quarter and a further €386m in the second quarter.

Quoted equities was the worst performing sector with negative returns of -12.5%, however Matti Vuoria, chief executive and president of Varma, said the fund had reduced its equity exposure and as a result "the risk level in our portfolio is clearly lower now than it was last year".

Varma revealed because of "unrest on the capital markets" it reduced its equity allocation from 34% to 24% and used the excess funds to increase its fixed income exposure to 43%.

The interim figures showed the "heavy downturn on the stock market and fluctuations in the financial markets" also hit hedge fund investments which returned -2.6%.

The fund's commodities portfolio was the best performer with returns of 17.1%, while real estate achieved 4.6%, increasing the market value of the fund's investments slightly from €28.4bn at the end of 2007 to €28.6bn at the end of June 2008.

The pension fund also confirmed its solvency capital - which acts as a risk buffer for investment operations - remained "sustainable" at €5.4bn, slightly down from the €7bn at the end of 2007.

Vuoria said the fund had retained its solvency - equivalent to 23.1% of technical provisions and 1.9 times the solvency limit - "despite difficulties on the investment market" as insurance sales had reached "record levels".

Tapiola's interim report meanwhile showed the negative return on its investment portfolio was -3.7%, compared to 3.7% in 2007, resulting in an investment return at current value of -€455m against a profit of €81.9m the previous year.

Quoted equities, which equate to around 25% of the investment portfolio, were the worst performers with a return of -12.7%, although the fund claimed the result was good considering the market conditions as a "vast European benchmark index" returned -18.8% over the same period.

Hanna Hiidenpalo, investment director at Tapiola Pension, revealed the fund had reduced its allocation to equities to below 30% at the end of 2007 to prepare for the "unstable market development".

Despite the poor equity returns, Tapiola confirmed it had not "significantly modified" the equity allocation, although the value of equity investments had dropped from €2.25bn at the end of 2007 to €2bn at the end of June.

"Tapiola Pension's equity investments are mainly targeted to European markets," said Hiidenpalo.

"We are not massively engaged in the financial sector equities. This has stabilised the company's portfolio, since the decreasing rates did not affect the equity portfolio as severely."

In addition, Tapiola claimed its investments in corporate bonds, the money market and real estate all reported a profit in the first half of 2008, although outstanding loans produced the best result with a return of 2.5%.

Figures showed the average five-year return on investments is around 6.8%, although market value of the fund's assets fell slightly from €7.9bn at the end of 2007 to €7.8bn in the middle of 2008.

This is despite an increase in premium income of 15.5% to €719.9m, resulting from a 17.3% increase in business from employees and a 3.7% rise in income from self-employed workers.

The report also revealed while the solvency margin for the pension fund had slipped from €1.4bn to €952m in the first half of the year - equivalent to 13.9% of technical provisions compared to 21.3%  - it said this is still "sufficient" as it is 1.4 times higher than the legal requirement.

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