Finland: Private sector funds subject to new solvency rules
The parameters of investment and liability risks of first-pillar funds have been re-calculated following a major overhaul of the country’s solvency framework
Regulation in summary
• A new solvency framework takes effect in 2017 but it has only minor implications for the average asset allocation of pension insurers.
• Rules governing buffers of equity returns will change.
• Implementation of the EU bookkeeping directive allows private-sector pension funds to use IFRS-based fair values, but pension insurance companies can only include fair values in notes to accounts.
• New pension benefit rules lift the earliest age for pension benefits and link changes to life expectancy.
Finland’s solvency framework has been through a major overhaul, resulting in a new solvency law being passed by Parliament in the spring of 2015, with the regulatory framework due to come into force at the beginning of 2017.
All forms of private sector fund in Finland – pension insurance companies, industry-wide funds and company pension funds providing statutory pension cover – are obliged to meet the solvency requirements in the new regulation based on the Finnish legislation HE 273/2010 vp and Laki työeläkevakuutusyhtiöistä 25.4.1997/354.
Because these funds belong to pillar one, according to the EU classification, solvency legislation is national, although the solvency regulation does not apply to the funds of public sector employees’ schemes.
The new framework aims to take into account all relevant investment and liability risks in a more detailed way and, on top of this, all relevant parameters have been re-estimated.
In common with the preceding rules, the new regulation is risk-based, but it uses risk factors associated with assets rather than risk parameters associated with asset classes – the new rules following the principle that certain types of asset may be exposed to many risk factors.
Finanssivalvonta, or the Financial Supervisory Authority (FIN-FSA), estimates that, on average, solvency capital requirements will not change much due to the reform.
The new framework has only minor implications for the average asset allocation of pension insurers, it says, but it notes that some might have to change their positions.
“As part of the pension reform in Finland, the rules governing equity return-related buffers on the liability side of the balance sheet of all forms of private-sector funds are changing. One of the buffers on the liability side is based on average returns of listed equity investments in developed countries”
However, at least some of this change has already taken place, says FIN-FSA, because of the long transitional phase leading up to the new rules.
As part of the pension reform in Finland, the rules governing equity return-related buffers on the liability side of the balance sheet of all forms of private-sector funds are changing.
One of the buffers on the liability side is calculated based on average returns of listed equity investments in developed countries.
At the moment, a coefficient of 10% is used to multiply the equity return percentage to determine by how much the equity return buffer must be correspondingly increased.
In 2017, this coefficient will rise to 15%, and to 20% thereafter. On an equity return of 20%, for example, this would mean the buffer would have to be increased by 2% now, then by 3% in 2017 and by 4% after that. The purpose of this change is to increase pension funds’ risk-bearing capacity.
As well as this, a new restriction is being introduced within the reform, limiting pension funds to a 65% equity allocation, although some may have enough solvency capital to be able to exceed this limit.
In practice, the changes may mean an individual pension insurer can increase the amount of equity investment in its portfolio by 7-8%.
Private sector pension funds in Finland became subject to amended accounting regulation on financial statements in January 2016, when the general EU directive on bookkeeping and financial statements was implemented into local law.
The main change was that the new legislation introduced an option for those providers not already obliged to publish reports based on International Financial Reporting Standards (IFRS) to use IFRS-based fair values in their financial statements in future. The other option open to them is to use book values.
But legislators and regulators could not find a solution enabling pension insurance companies to apply the fair value option to their balance sheets because, for these companies, liabilities are derived from pension legislation that is not compatible with IFRS.
So, fair values of pension insurance companies’ assets are now reported in notes to the financial statements, as well as in solvency and performance reports.
Changes to pension benefit rules within the Finnish pension reform (Finnish legislation: HE 16/2015 vp), passed by Parliament in the autumn of 2015 take effect in January 2017.
The main changes are a rise in the lowest ages for receipt of the old-age pension and linking these changes to life expectancy; the introduction of actuarially defined full and partial old-age pensions, if they are drawn later or earlier than the lowest age; and the introduction of a years-of-service pension. The reform is intended to stabilise the contribution rates needed to finance benefits at present levels.