With falling asset prices hitting solvency ratios at providers in Finland’s first-pillar earnings-related pension system, the country’s Ministry of Social Affairs and Health has prepared a bill on the temporary strengthening of pension insurers’ solvency.
The idea is that the proposal can be submitted to parliament immediately if average solvency plummets – preventing pension insurance companies from forced sales of equities at depressed prices.
The proposal was drawn up on 27 April, the ministry announced.
“The proposal will be issued only if the average solvency of institutions for occupational retirement provision decreases substantially due to the deterioration of the financial market situation,” it said.
The proposal was put together in co-operation with the central labour market organisations, the Finnish Financial Supervisory Authority (FIN-FSA) and the Finnish Centre for Pensions, the ministry said.
Work on the draft followed a report from FIN-FSA on 13 March, that the average solvency of pension institutions was at a moderate level, but threatened to decline if financial market developments continued in that direction, it said.
“However, after mid-March, the situation calmed down and the average solvency of pension institutions has remained at a reasonably good level,” the ministry said.
Hanna Mäkinen, mathematician at Finnish pensions alliance TELA, commented that although the tumult on global stock markets seemed to have calmed, future prospects were still very uncertain.
“That is why it is good to prepare for a very fast-changing situation by preparing a temporary law now,” she said.
“In this way, it will be implemented quickly if necessary, if the situation in the financial markets changes significantly so that the average solvency of employment pension insurers decreases substantially from the current level,” Mäkinen said.
It was important for their operations that pension insurance companies were able to assess when any legislation would come into force, she said, adding: “For this reason, it is good that the Financial Supervision Authority is publishing information on the average solvency of employment pension insurers more frequently than usual.”
TELA, whose members include pension insurance companies and pension funds, said the precautionary bill included three different measures that could be used to strengthen the solvency capital of occupational pension insurers, which would make it possible for the providers to avoid having to sell their investment assets to a significant extent in an unfavourable market situation.
“In this way, pension assets’ good long-term return potential would be supported, as well as the financial stability and sustainability of the pension system,” Mäkinen said.
The solvency regulation applies to Finland’s private-sector employment pension insurers including pension insurance companies and pension funds, TELA said.
Solvency capital at the country’s two largest pension insurance companies, Ilmarinen and Varma, were shown to have fallen by 25% and 30% respectively when the firms reported first quarter results last week, but both firms said ratios remained well above minimum requirements.