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Finnish insurers fast on feet

The Finnish model of pensions and social welfare looks like an exemplar of the political centre-left’s ‘third way’. The statutory scheme that ensures all working Finns receive a basic plus a generous earnings-related pension, together with long-term disability and unemployment cover, is run competitively by the private sector on behalf of the state, which exercises control.
The main providers of these benefits are six mutual pension insurance companies, plus a number of pension foundations and company funds that together have around 15% of the market. Competition is fierce, business being won or lost on charges and investment returns; although individuals’ pension entitlements are fixed, good performance allows rebates of contributions. Market shares for the pension insurers range from 34% for Varma-Sampo and 27% for Ilmarinen (associated with the Pohjola Group) to the tiny 0.3% of Alandia. Together, the pension insurers managed assets amounted to e36bn at the end of 1999.
With its tiny market share, how does Alandia survive? Its market is the Swedish-speaking Alandia islands, situated in the Gulf of Bothnia. Alandia’s Tony Karlström says: “We have a 97% market share here and strong customer loyalty. We may be small but that is the secret of our success: we are highly efficient and deliver our customers very good investment returns.”
There is a distinct tension between the pension companies and the pension foundations. Firms can move their entire pension arrangements from a foundation to a pensions insurer, but legislation prevents transfers in the opposite direction. Folke Bergström of the Association of Pension Foundations says, “We are pressing for changes in legislation to put us on an equal footing with pension companies. Naturally they are opposed to this, but the government is sympathetic.” Bergström hopes for a change in the law by 2002. The pension foundations seem to be out-performing the pension insurers by a handsome margin. Last year they oversaw asset growth of 25% while the latter managed just half that. “We get such good returns by using external asset managers, whereas the pension companies do it in-house,” says Bergström.
Life companies have a relatively minor role in the Finnish pensions scene because the state scheme is so generous. But there is some room for top-ups on a personal or scheme basis. These supplementary pensions are broadly similar to the statutory pensions but offer a little more flexibility – for example, the ability to draw funds earlier than the standard retirement age. At e400m in premiums in 1999 though, personal pensions are small beer in comparison to other life business, which totalled e2.3bn. Moreover, personal pensions premiums have risen only modestly, and last year growth slowed still further as a result of harsher taxation rules. Voluntary group schemes grew by a healthier 16%. But other life assurance premiums have positively rocketed in recent years, climbing from less than e500m in 1995.
For life companies this burgeoning premium income is a reflection of a very healthy Finnish economy and their ability to compete against other financial institutions in the personal investment market. Equities feature strongly, and now form a bigger proportion of personal wealth than bank deposits. This upward trend is mirrored in the assets of life and pensions companies – equities now form almost 50% of life companies’ funds under management – totalling e19.1bn in 1999 – and a quarter of those of the mutual pension insurers. Increases are as much as a result of share growth as of investment policy: life companies’ equity investments nearly doubled in 1999.
Fourteen domestic life offices compete with eight branches of foreign companies. The market underwent a re-structuring a few years ago to eliminate complex cross-shareholdings; there have been takeovers and mergers with bank groups, and alliances with other Nordic financial institutions. Merita, which has nearly 30% of the life market, is bank-owned, as is Aurum (by Okobank) with about 10%. At the end of this year, Sampo Group will merge with Leonia Bank, resulting in an approximate 70% domination of the market by bancassurance.
The main other players are Pohjola and Tapiola, with market shares of approximately 18% and 6% respectively, but there are various other companies with shares of 2.5% or less. These small players must be feeling vulnerable in the face of tough competition from other groups that have the scale of operations throughout the Nordic region, strong distribution capability and real financial muscle. The traditional companies acknowledge that distribution is key but may be able to draw upon the strengths of other relationships, particularly where pensions are concerned. Onerva Savolainen of Pohjola says, “We tend to take an overall view of our corporate clients and the total business they place with us. We have many longstanding strong relationships that enable us to generate loyalty. And like some other companies our sales force is a group resource selling a variety of products, which helps increase efficiency.”
The internet is a distribution channel that is growing in importance and several companies are investing significantly in the introduction and development of electronic access to products and services. Here again, being part of a broad-based financial group is an advantage because the costs can be spread and the benefits reaped across a range of products. These Finnish developments illustrate how Nordic companies have been at the forefront of e-access and are working hard towards true integration of their distribution channels.
Finland might have a population of only just over 5m, but the market’s dynamics bear no relation to its size. There are moves afoot to raise the retirement age to relieve pressure on pensions contributions. From 1 January next, the pension companies’ right to offer supplementary pensions ends, increasing the power of life companies. And pension foundations stand to gain from that relaxation of the rules on scheme transfers. While some commentators believe that significant change among providers of statutory pensions is unlikely, the life market could well see further reform including, maybe, further influx of foreign capital.
The Finnish life and pensions market is exceptionally competitive and fast moving – and looks like staying that way.

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