Nordic Region: Corporates flying high
Corporate pension funds have consistently outperformed others in the pensions industry, and they want more freedom to set contributions, Pasi Strömberg tells Reeta Paakkinen
Last year was a good investment year for corporate pension funds in Finland, according to Pasi Strömberg, managing director of Eläkesäätiöyhdistys, the Finnish pension fund association.
In 2012, corporate pension funds yielded a return of 11.1%, while mutual pension insurance companies achieved a return of 8.2%. Corporate pension funds have also fared better over the long term in Finland. Between 1998-2012 they gave the best returns in the whole pensions industry, 6% on the average, while mutual pension insurance companies returned 5.1%.
Strömberg believes one contributing factor to corporate funds’ stronger returns is that nearly all of them have a healthier asset solvency ratio than local pension insurance companies have. The asset solvency ratio at pension funds was 38.6% on average, while mutual pension insurance companies had an asset solvency ratio of 25.5% in 2012.
“Corporate pension funds make use of their stronger position. Better asset solvency ratio and convenient fund size give corporate pension funds more flexibility to allocate their assets and, if they wish, take more risk. This reflects in their investment returns,” he says.
Presently, there are around 50 corporate funds, of which 18 offer statutory pension cover and manage assets totalling €5bn, and seven mutual pension insurance companies managing €91bn. Corporate pension funds manage 6% of all assets in the private sector first-pillar market.
Varma and Ilmarinen, two of Finland’s largest mutual pension insurance companies, manage 69% (€66.5bn) of all assets in the market. The large market share that mutual pension insurance companies have in the second pillar has attracted criticism from corporate funds, whose representatives say current regulation is more favourable to mutual pension insurance companies.
The association is currently waiting for the introduction of new regulatory framework for Finnish corporate pension funds. The Ministry of Social Affairs and Health will publish a list of suggested reforms by the end of April, based on industry consultation. The new legislation aims at ensuring employers have a functioning alternative to mutual pension insurance companies when arranging employee pension cover.
Strömberg hopes the reforms will improve competition in the market between different institutions providing statutory pensions cover, and says reform is very important for the Finnish capital market. It is vital that there are several institutional investors with different kinds of preferences, he said.
“The current regulations on choosing a pension institution and transferring pension cover from one institution to another need to be critically evaluated so that the existence of functioning alternatives can be guaranteed,” Strömberg says. “The premise for establishing new corporate pension funds needs to be strengthened as this provides an alternative in the market, which on its part promotes healthy competition and makes the whole labour pension system more efficient,” he added.
The pension fund association recently conducted a survey that found many companies would like to have more power in deciding the level of contributions. “The only way to effect this is to provide employee’s pension coverage in-house at the firm. More than half of corporate directors who responded to our survey found it important that the company can decide for itself how risky to make their investments. The transparency around calculating management fees is also considered a very important issue,” Strömberg concludes.