Pension providers in Finland for private-sector workers increased their solvency levels last year despite higher weightings to risker assets, giving the firms a buffer against the weaker economic outlook, according to an assessment by the country’s financial regulator.
In a report on the financial sector’s operating environment this spring, in the light of the “period of new uncertainty” which it said had begun, the Finnish FSA (Finanssivalvonta, FIN-FSA) said solvency in the employee pension sector had risen steadily on the back of positive developments in the financial markets.
At the end of 2021 the sector’s solvency ratio was 136.3%, up from 129.1% a year before, the watchdog said.
“Investment assets grew to €159bn (from €138.1bn in December 2020bn), mainly due to returns on equities, and growth was also supported by other investment classes,” FIN-FSA said.
“Reflecting the increase in solvency capital, the employee pension sector’s resilience was good at the turn of the year against negative value changes in investment assets,” it said.
FIN-FSA said Russia’s invasion of Ukraine had increased the risks for the Finnish financial sector in a manner that was difficult to anticipate.
Anneli Tuominen, the authority’s director general, said: “The Financial Supervisory Authority is monitoring the operating environment on an enhanced basis and in a variety of ways in cooperation with Finnish and European authorities.”
The sector’s equity allocation had increased to 49.5% at the end of 2021 from 42.3% in the market slump of March 2020.
Within equities, the proportion of listed equities had decreased during 2021, however, according to the report, “due to the increased use of private equity as an investment target and the very strong appreciation of private equity in 2021”.
Over the last 10 years, private equity had returned more than had listed equity for Finnish private sector occupational pension providers, according to the FIN-FSA figures, with listed equities having generated an annual average of 11% compared to 19% for unlisted shares in the period.
Overall, equities produced an average annual 16% return for the providers, it reported.
The FSA said that the increase in solvency had been such that in the current situation, the providers’ equity investments would have to fall in value by 53% before reaching any critical point for solvency, whereas a year ago, their equities would only have had to decline by 48% before they were near that level.
Hanna Mäkinen, mathematician at TELA, the industry association for providers of Finland’s earnings related pension, said the average solvency ratio for the country’s private sector occupational pension providers had risen to its highest level in the last 10 years.
“Strong solvency is now needed, as the duration of the crisis caused by the war or the final economic effects cannot yet be assessed,” she said.
Finland’s largest pension insurance companies reported particularly high returns on their private equity investments in 2021.