VER drops €1.93bn as equity losses exceed 42%
FINLAND - Valtion Eläkerahasto (VER), the State Pension Fund, has reported an overall investment return of -15.8% in 2008, driven primarily by the results from its equity portfolio which lost 42.7% over the year.
Figures from the fund’s annual statement showed the value of the investment assets dropped from €12.3bn in 2007 to €10.4bn, even though the scheme reduced its equity exposure by seven percentage points to 31%, and increased both fixed income and other investments.
At the end of 2008 VER’s portfolio comprised 61.4% in fixed income, 31% in equities and 7.6% in other investments including real estate, private equity, infrastructure funds and absolute return funds.
Fixed income investments produced the best return of 4.4% as VER revealed allocations of corporate bonds and sovereign bonds increased to become slightly overweight by the end of 2008, while money market investments ended underweight, although the value of the portfolio still fell slightly from €6.7bn to €6.4bn.
VER directly invests in sovereign bonds, investment grade corporate bonds and money market instruments at present, while other fixed-income investments are made through mutual funds, with direct investments accounting for around 87% of the total fixed-income portfolio.
The Finnish government announced in January 2009 VER would increase its investment in Finnish ‘commercial papers’ - bonds issued by companies for less than a year - and last month the state pension fund confirmed it had allocated €100m to the commercial paper market, and could increase its investments by up to €500m depending on the market situation. (See earlier IPE article: VER may take 10% of local commercial paper)
However, despite the changes to asset allocation over the year, VER confirmed the net return on investment activities was -€1.93bn in 2008, as the equity portfolio achieved a negative return of 42.7% compared to a positive return of 0.7% in 2007, causing the value of the portfolio to drop €1.4bn to €3.2bn.
VER noted that within the equity portfolio, which was kept underweight throughout the year in relation to its strategic allocation, the Nordic and emerging market regions produced the lowest returns, while shares and funds in Japan performed best as a result of the strengthening yen.
Figures from the pension fund - established to provide for the State’s future pension liabilities - meanwhile also revealed alternative investments failed to produce a positive result with an overall return of -11.2%, against a positive 9.5% the previous year.
Although VER pointed out the average return on investments is 3.5% a year between 2004-08, the funding ratio of the scheme dropped from 15% to 12% - less than 50% of its funding target of 25% of the state pension system’s pension liability, which is valued at €85.6bn in 2008.
Timo Löyttyniemi, managing director of VER, said: “The worldwide financial crisis has affected VER’s investments, too. For pension investors, it was one of the most difficult years in the past few decades. Given the circumstances, however, the structure of VER’s investment portfolio is solid and well-balanced.”
Löyttyniemi admitted the fund expects the “disturbances” in the equity, fixed-income and currency markets may continue in 2009, but added “we are nevertheless convinced that the conservative structure of our current portfolio prepares us well for any changes in the investment market’s situation”.
The state pension fund, which covers 190,000 employees and pays benefits to 312,000 people, reported contributions from employers and employees rose by €55.3m to €1.6bn in 2008.
However, net premiums to the fund were significantly lower than 2007 at €271m, compared with €1.54bn the previous year, while VER confirmed €1.33bn was transferred to the Finnish state budget to cover pension and other costs, which is almost four times higher than the €3.5m withdrawn by the government in 2007 - although under the terms of the State Pension Act “an amount equalling 40% of annual pension expenditure can be transferred from the fund to the state budget”.
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