​Ilmarinen chief says solvency rules ‘short-sighted and encourage procyclical behaviour’

Three of Finland’s four pension insurers reported investment losses for the third quarter, with the head of the largest, Ilmarinen, using today’s financial results update to press for changes to the current solvency rules to free the firms to chase higher returns.

Ilmarinen, along with Varma, the largest of the private-sector earnings-related pension institutions, said higher long-term returns had to be sought for pension assets, referring to the new government’s plan to change occupational pensions law to make the system sustainable.

Although the earnings-related pension system was in good shape, the Helsinki-based firm said preparations had to be made to face the pressure to increase pension contributions as a result of demographic development. It said that increasing the return on investments was an effective way to improve the system’s financial and social sustainability.

Jouko Pölönen, Ilmarinen’s president and chief executive officer, said: “For that reason, the best possible return on pension assets must be ensured by developing solvency regulation. Current solvency regulations are short-sighted, complicated and encourage procyclical investment behaviour.”

The rules meant investment operations could not take advantage of the very long investment horizon of pension funds, he said.

Ilmarinen reported a 3.3% return on investments for January to September, lower than the 3.7% gain posted for January to June, with the market value of investments slipping to €57.7bn at the end of September from €58.2bn at the end of the first half.

Varma, meanwhile, reported a 2.8% return for the nine-month period, which is slightly higher than the 2.6% reported at the half-year stage. Its investments total rose in the third quarter to €57.7bn from €57.2bn.

Risto Murto, Varma’s president and CEO, said: “So far, the year has delivered relatively ordinary returns to pension investors, but towards autumn, the outlook weakened clearly.

“In terms of Finland’s and the euro-zone’s economic growth, it is crucial for the ECB to be able to lower its interest rates next year,” he said.

Elo makes €93m write-down on direct real estate; Veritas CIO warns of protectionism

Elo on Wednesday reported a 2.7% return on investments for the nine months – down from the 2.8% achieved for the first half – saying the overall gains had been reduced by write-downs on its real estate investments.

The market value of the investments stood at €28.8bn at the end of September, down from €29.0bn at the end of June.

Carl Pettersson, Elo’s CEO, said equity and fixed income markets had both generated weak returns in the third quarter, on fears of continued tight monetary policy.

“Returns in the real estate market were also subject to pressures, and we recognised a write-down of €93m on direct real estate investments at the end of September,” he said.

Veritas, the smallest of the four pension insurance companies in the earnings-related pension system, earlier this week reported a 2.3% investment return for January to September, with a -0.2% Q3 return having set 2023 returns back.

Veritas’ chief investment officer Kari Vatanen said he was confident the Finnish economy – forecast to slip into recession this year – would start to grow again in 2024, but warned that prolonged inflation, high interest rates and lower economic growth would not be easy to overcome.

”In terms of the whole world, the outlook for international trade does not look too good,” he said.

“We are heading towards protectionism, which will mean permanently lower growth, higher inflation and decreasing world trade,” said Vatanen, adding that corporate debt refinancing risks had increased along with higher interest rates.

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