Ilmarinen’s investments chief Mikko Mursula has come out with three concrete suggestions for ways the legal framework around private-sector pensions investment in Finland could be changed to allow providers to pursue higher-returning investments.
Mursula, deputy chief executive officer, investments, at the €55bn Finnish mutual pensions insurance company, said in a blog published today that pension liabilities could be seen more flexibly, that the solvency limit could be interpreted as a longer-term floor and that new risk categories could be introduced with lower capital requirements – for example, for infrastructure assets.
Grappling with an ageing population, he noted that back in 1997, Finland had changed the law in order to give pension investors the opportunity to take on more risk than before in order to produce better returns.
“The 1997 law reform has helped a lot, but because the birth rate has fallen even further, for example, more changes to the law and the framework governing the investment activities of pension investors are now needed,” he said.
Since investment returns had a big impact on the long-term level of pension payments, the investment chief said it was worth constantly researching and looking for ways to increase system-level return expectations.
“Raising the return expectation naturally involves raising the risk level, but the long duration in the nature of the pension liability debt makes it possible,” he wrote in the blog.
Mursula cited three examples of themes that he said were at least worth exploring.
The first suggestion was to introduce a “flexible pre-retirement pension liability”, which would allow pension investors to take advantage of the fact old-age pension liabilities were long term, and therefore avoid selling investment instruments at a bad time.
“Flexibility could be implemented, for example, by indexing the future pension liability to the return of a pre-determined investment basket,” Mursula suggested.
This, he said, would increase the flexibility of the technical liability downwards in a market downturn, so reducing pro-cyclicality, and making it possible not only to keep risky investments in the portfolio through a crisis, but even to increase them when they were cheap.
Secondly, Mursula proposed that solvency limits could be treated more flexibly, and be reviewed on a rolling basis rather than using the more rigid current method.
This would restore the original meaning of the solvency limit as an early warning, he said.
“It would allow for momentary limit breaches and the solvency position would be reviewed on a rolling basis in the longer term,” he said, adding that it would reduce the need for operators’ risk buffers and their need to prepare for short-term market declines.
The effect of the change would be reduce the need for forced asset sales, he said.
Mursula’s third suggestion is to modify existing risk categories, for example, by adding a separate infrastructure risk category.
“This would enable and even encourage investing in instruments – for example, large infrastructure projects – whose capital requirements are currently too high in relation to their actual risk,” he wrote.
Though this change would have a smaller effect than the previous two ideas, Mursula said, “it would take the system in the right direction from the point of view of the risk base, and at the same time make more of the large infrastructure projects in the pipeline more interesting investment targets for pension companies.”