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Finnish state fund drops 6.4%

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  • Finnish state fund drops 6.4%

FINLAND - Valtion Eläkerahasto (VER), the Finnish state pension fund, posted a first half return of -6.4%, driven by a 17% loss on equity investments while Etera Mutual Pension Insurance Company lost €460m.

The total value of VER's investment assets fell slightly from €12.1bn at the end of December 2007 to €11.4bn at the end of June 2008, with the value of fixed income investments dropping from €7.7bn to €6.6bn.

As the state pension fund, VER has strict operating limits for its investment portfolio set out by the Ministry of Finance which requires the allocation to fixed-income assets to be at least 45%, while equities cannot exceed 45% and the share of other investments must not be higher than 12%.

The interim figures showed at the end of June 2008 VER had 58.4% allocated to fixed-income investments which returned 0.4%, an improvement on the -1.2% return from the same period.

VER said in the first half of 2008 the interest rate risk on its fixed income assets was reduced by "changing the fund's strategic interest allocation", so that the basic allocation to money markets was increased to 25%.

However, figures showed the fund's equity investments, equivalent to 34.4% of assets, was the worst performer with a negative return of -17.1%, causing a drop in value from €4.6bn at the end of December 2007 to €3.9bn at the end of June.
 
The fund's other investments in real estate, infrastructure, venture capital and absolute return funds - which make up 7.2% of the portfolio - achieved an overall return of -1%, although the value of the investments actually grew in size from €760m at the end of 2007 to €813m.

Of these 'other' investments, the interim results showed absolute return funds produced the best result of 0.2%, while venture capital and real estate funds yielded a negative return.

Timo Löyttyniemi, managing director of VER, said: "The substantial downswing in share prices at the beginning of the year affected development for the entire first half. We have kept the equity weighting below normal ever since last autumn. However, as raw material prices and inflation expectations have eased, signs of normalisation have become visible in investment markets during the summer."

Meanwhile, Etera Mutual Pension Insurance Company reported a 13% fall in premium income from pension policies in the first half, compared to the previous year, as it was "affected by a substantial loss of customers during its first year of competition expansion in 2007".

Prior to 207, Etera was the sole provider of LEL and TaEL pension insurance for employees working in construction, forestry, agriculture, dock work and the performing arts, but following changes to the pension system Etera started to compete with other pension companies to offer insurance to all employed (TyEL) and self-employed (YEL) people.

As a result the firm's income from pension premiums was €261m in the first half, compared to €299.4m in the same period in 2007, although the interim figures showed Etera took 15% of all new TyEL insurance policies and 4% of all new YEL policies, with the number of policies totalling 17,320 and 1,888 respectively.

Kalevi Hemilä, managing director of Etera, said: "Etera's insurance policy sales have been profitable during the first half of 2008. The premium income on new policies is higher than that on the policies of those clients who left."

In addition to the increased competition the overall result for the firm was -€460m as the return on investments was -5.8%, causing the value of the investment portfolio to fall from €6.09bn to €5.68bn.

Hemilä said: "Etera's overall result was weakened due to the return on investments for the first half of the year, which was -€356m."

Quoted equities, which accounts for 39.1% of the portfolio, returned -15.4%, as the level of share prices was 10-20% lower than the end of 2007 depending on the geographical region, while the fund's 5.1% allocation to absolute return investments returned -2.3%.

The best return came from the 3.5% allocation to loan receivables, which returned 2.5%, while private equity returned 0.7%, unquoted equities yielded 8% and real estate investments posted a profit of 1.1%.

However, fixed income investments, valued at €2.48bn or 39.6% of the portfolio, reported a loss in the first half of -1.2% as "interest rates increased and credit margins broadened", with government bonds producing the worst return within the asset class of -1.5% because of the high inflation rate.

Mika Pesonen, chief investment officer, said: "The first quarter was marked by concerns relating to the expansion of the US bank and credit crisis. During the second quarter, the rising oil price and accelerating inflation increased risks in the equity and interest markets."

That said, Hemilä claimed Etera's solvency "remained solid despite uncertainty in the investment markets, with a solvency margin of €1.02bn, or 21.3% of technical provisions, which equates to 1.7 times the minimum solvency requirement.

Pesonen added: "Our solvency enables us to seek secured returned by keeping the share of equities at the present 30% of all investments. The strengthening of the US dollar and the fall in the price of oil since June has improved the outlook for equities for the second half of the year."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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