FINLAND - The €25.3bn Varma Mutual Pension Insurance Co. made a return on its investments of 1.3% in the first half - down from 6.7% a year before.

It reported a total result was -€294m - mainly due to the fact the investment return remained below the calculated interest rate of 6%.

The figures come as it reported a 10% decline in pension applications over the same period. Varma's solvency margin decreased by €315m and amounted to 26.6% of technical provisions

"The investment market was challenging during the first half of the year," said president and chief executive Matti Vuoria.

"International interest rates went up significantly, which eroded the value of fixed-income investments.

"Our equity investments yielded a positive return, even though the share prices took a clear downward trend in May-June after three years of strong increase."

Varma's loan portfolio returned 2.3% while bonds returned -1.8%. Other money-market instruments and deposits gained 1.1%.

Equities (including private equity and hedge funds) returned 4.5% while real estate was up 3.5%. Equities accounted for almost 41% of investment assets.

"The growth mainly came from mutual trust investments involving so-called alternative forms of investment, in particular hedge funds," Varma said. "The share of fixed-income investments decreased correspondingly."

Varma handled 11,200 new pension applications during the first half - a 10% decline.

The company said the reform of earnings-related pension legislation at the beginning of 2007 will "pose a great challenge on the efficiency of information systems, the personnel's expertise and the ability to operate in a new competitive environment, as short-term employment relationships can also be insured at Varma".