Changes to Finland’s pensions landscape indicate that reforms are having an impact, but not always as intended, finds George Coats

The decision by Finnish mobile telephone supplier Nokia to dissolve its corporate pension fund and transfer the liabilities and assets to mutual pension insurers Varma and Ilmarinen, may signal a change in the Finnish pensions landscape.

The switch, which was implemented in March, coincided with the opening of a Pensions Forum by social affairs and health minister Liisa Hyssälä. It is intended to bring together a broad representation of bodies that decide on, implement and assess Finnish pensions policy.

While there is no suggestion that the developments signal an earthquake in the Finnish pensions landscape, they do represent a slight shift in the tectonic plates.

Corporate pension funds have been declining in number for some years but the closure of the Nokia fund and Nokia’s switch to pension mutuals may have delivered a body blow to the corporate sector.

But Jouko Bergius, the managing director of the Association of Pension Foundations, which groups corporate and industry-wide funds, appears untroubled. “There were 47 members of the foundation 10 years ago and now there are 35,” he says. “We had about 10% of the market but Nokia’s leaving means our situation remains about the same, maybe around 8%.”

Other observers think it is substantially more serious. “Nokia was by far the biggest pension fund so it will make a big dent in that end of the business,” says one. “The worry is that Nokia may set a trend that will be followed by other company funds.”

In an announcement, Nokia said it was transferring its €1.2bn statutory pension liabilities to Ilmarinen and Varma so that it could “focus its human resources planning on more proactive measures such as maintaining and improving personnel’s working capacity and well-being at work”.

Varma and Ilmarinen are Finland’s largest pension funds and Nokia will be their largest customer.

“There has been a trend towards closing corporate pension funds,” says Mikko Mursula, head of listed securities at Ilmarinen. “But it is difficult to say what are the actual reasons behind the closures. Nokia made it clear that it recognised that pensions was not its core activity. However, generally one of the most important reasons is the volatility that a pension fund represents to the sponsoring company. But as to the question of whether this means the end for the corporate pension fund as a whole, I wouldn’t go that far.”

Companies with pension funds are under the same pressure from international reporting standards as corporates elsewhere in Europe. And there are additional Finnish obligations. “If a company opts for its own pension fund it is liable for all the pension liabilities with all its assets,” notes Matti Leppälä, (pictured right) director responsible for international and legal affairs for the Finnish Pensions Alliance (TELA). “Only if all the assets are exhausted and there are still liabilities are they covered by all the other pension insurers in the private sector.”

But Bergius blames the lack of a level playing field for the reduction of corporate pension funds. He notes that Finnish regulations reward companies for transferring their pension funds to a mutual pensions insurer. Corporate pension funds in effect have higher solvency requirements than pension insurance companies so they can transfer all the liabilities but retain the difference in solvency capital. “For instance a company pension fund’s solvency capital can be about 35%,” he says. “The transferable solvency margin in recent years has been from 11.8% to 25.8%. If a pension fund transfers its pension liabilities to a mutual pension insurance company the rest can be transferred to the employer. This makes the situation very difficult for pension funds and that’s why some employers are going to pension companies.”

But ironically the situation arose as the result of changes intended to encourage competition in the sector, says Hannu Uusitalo, director at the Finnish Centre for Pensions, a semi-public authority that keeps the records of all accrued pensions and conducts research on the sector that informs government policy. “One of the efforts to make the competition more equal was to make it easier to move from company to insurer and from insurer to company. But it might have worked in a way that was not intended.”

The Pension Forum is intended to monitor and assess the implementation of recent pension reforms that widened the investment options open to pensions vehicles, essentially increasing the opportunities to invest in equities.

However, it is not yet clear just what the forum’s role and importance will be. Hyssälä has said that it will look at how changes in pension investment rules, introduced in 2007, have worked out. But industry sources suggest that the social partners, who have been almost solely responsible for making pensions policy for more than 40 years, will not easily allow another party, minister or not, to interfere in any substantial way. Indeed, the 2007 changes implemented proposals that had been hammered out by a committee of employer and trade union representatives chaired by former Ilmarinen CEO Kari Puro.

“Since 1996 there had been efforts to liberalise the investment decisions of pension funds and at the same time returns have been good despite the market downturns of 2001-03 and now the current crisis,” recalls Uusitalo. “However, there have been suggestions that we should actually increase the controls.”

“The change occurred very rapidly,” says Leppälä. “Now equities is the big asset class and it is widely diversified globally as well as by sector. But the last quarter of last year was difficult and we estimate that for last year the aggregate real return for all our members - public and private sector pension funds - was 2.6%. For 2006 it was 8.7% and 6.4% respectively. We are a partially funded system, about 75% is PAYG and the rest is based on funding and the returns on investment, and for a sustainable pension policy the long-term real returns should be 4% annually. For the past 10 years, during which we have experienced two upward cycles and one downward cycle, we achieved 7.1%.”

The aim of the forum is to postpone the retirement age, to guarantee adequate pension provision in the future and ensure its sustainable financing in the long term, Hyssälä has stressed.

“The general discussion about the retirement age has changed quite radically,” says Uusitalo. “When the reform was planned many asked how do you expect to keep people working so long. But now sentiment is more in favour of working longer. There are carrots and sticks. People get a higher accrual rating if they continue working after 63, and the stick is an increase of the age limits on some early retirement schemes and the abolishing of others. Initially employers were sceptical. There were suggestions that those they would like to get rid of would stay and those they would like to keep would retire. But there is an increasing awareness that the number of people who exit the labour force will be higher than the number of people who enter it. So gradually employers see more reasons to retain their older workers.”

Nevertheless, contributions will also have to increase. “In terms of the overall contributions we foresee an increase of 1% to 1.5% of GDP to make the system sustainable,” says Uusitalo. “Nowadays pension contributions are roughly 26% of GDP and we anticipate an increase to over 27%. But increases will have to be higher for private sector schemes because public sector schemes are already very close to that level. So we forecast a private sector increase of 5% of the wage sum, which is about 2.5% of the GDP, and that increase will be phased in by 2030 after which it will be stable.”

The government is also proposing to merge the supervisory authorities to create a single financial supervisor to oversee banks, insurance companies and pension insurers.

“This is not controversial,” says Leppälä. “The development of financial conglomerates and the interactions between banks and insurance companies has reached the point where it is not seen as a threat that banking risks would contaminate pension insurers. But we are very much in favour of keeping the regulatory side of the content of the statutory pension system with the ministry of social security and health and not the finance ministry.”

Bergius is also in favour of the merger. “Finland is a small country so we do not have so many people who can be experts in the supervision of financial markets and the pension system,” he says. “So from that sense it is better they are together.”