Swedbank Investment Funds
Robert Kitt
Board member
• Invested assets: EEK7.3bn (€460m) (30.11.09)
• Participants: 300,000
• DC scheme - four mandatory second pillar and three third pillar funds
• All Estonian second pillar pension funds were established in 2002

The key issue in 2009 was the temporary halt of pension contributions by the government. While individuals pay 2% of their wages into Estonia's mandatory second pillar system, the government usually tops the individual accounts up with 4% of the participant's first pillar contribution. However, due to Estonia's budget deficits, the latter contributions were halted from June 2009 and are only due to flow again in 2011 (compensation for the non-contributory period for employees who continued to pay their 2%, is available, although dependent on certain economic conditions). 2010 will be a transition period.

The moment of truth for Estonia's handling of the crisis will come in the first six months of 2010, as a decision should then be made as to whether Estonia will adopt the euro as a currency from 2011. To be eligible for the euro, the fiscal deficit must remain below 3% and with 2.8% we are on target.

Estonia is one of a few countries in the world, that has no domestic bond market, as central government debt only amounts to 4% of GDP - although there is, of course, private sector debt. While a new base currency does not actually change that much, the adoption of the euro will significantly reduce the risk margin of the country, impacting on our fixed income market and creating opportunities there.

The cut in contributions has not had a significant impact on our asset allocation, particularly as the system has between 10 to 20 years to mature before it pays out any pensions.

Tactical asset allocation is important to us, especially as the current environment has encouraged us to be close to the maximum equity allocation in our various investments portfolios with 25%, 50% and 75% equity exposure.

Among signs of a global economic recovery, interesting opportunities may arise from asset classes in 2010 that were popular two years ago but had a terrible time in 2008, when the Baltic region was widely regarded as the sick man of Europe. The private equity and mezzanine level financing in Estonia, the Baltic or Eastern European region, for example, could offer very good opportunities because the supply of capital to this area sharply decreased amid the financial crisis.

We already moved into private equity in 2007, but fortunately did not have a lot of exposure in 2008. But we aim to gradually add to this allocation to a maximum of 5-10% of the portfolios in the future.


Stapi Pension Fund
Kári Arnór Kárason
Managing director
• Invested assets: ISK106bn(€576m) (30.11.09)
• Active members: 20,000
• Hybrid (conditional DB)
• Solvency ratio: 90%
• Date established: 2007

If we have a sustainable recovery, we are likely to see the riskier asset classes continue to perform in 2010, but I do not expect 2010 to have as sharp a recovery as 2009. That is why we are currently defensively positioned and will continue to be so. In fact, we expect this to be a very slow recovery, with a possible negative dip in growth again in the new year.

In 2009, we slightly increased our equity exposure and we may increase it even further before we anticipate growth to slow again, depending on the markets in 2010.

The biggest challenge for us is the level of interest rates, which are currently low in most countries, with the exception of Iceland.

Last year we increased our strategic holdings in assets that we think will match our liabilities the best. But short-term tactical or dynamic asset allocation is also very important to us. Tactical asset allocation is supposed to enhance returns a little bit further and after reducing our tactical bets in 2007 and 2008, we increased them again slightly in 2009. We may again add to them somewhat in 2010.

However, the capital controls which were introduced in Iceland in response to the country's economic collapse in autumn 2008 have been very restrictive for us. They meant that Icelandic pension funds were no longer able to make any new investments in foreign currency denominated assets, thereby sharply limiting the scope of our investment universe.

And by limiting our possibilities to diversify they have also increased our risk profile because all new contributions have had to be invested in domestic assets.

Politicians say the controls are going to be lifted in 2010 but we do not expect them to be. If they are going to be lifted in 2010, it will take place very gradually. Therefore, we have positioned ourselves on the basis that they will stay in place by having more liquid and low-interest bearing assets.

A lesson we have learnt from the financial crisis is that the financial system is very fragile and that it takes very little for it to go wrong. Another lesson has been that counterparty risk is a real risk, and that large banks may ultimately be much riskier than small ones.
Our priority for 2010 is to maintain or increase the funding ratio and not let it deteriorate by losing any more money.


Pensioenfonds Vervoer
Patrick Groenendijk
• Invested assets: €8.5bn (including the January 2009 merger)
• Participants: 600,000 (including the merger)
• DB
• Solvency ratio: 101% (as of November 2009)
• Date established: 1964

As of 1 January we will have merged with three early retirement plans in the private transport industry, which increases our invested assets by €1.8bn to around €8.5bn. We have known these schemes for a long time and merger preparations started as far back as 2006.

But because we will have more short-term liabilities in the fund following the merger, we will need to adapt our asset allocation to that. There are no plans to change our asset allocation significantly.

We will adjust our interest rate risk management to the new situation but in other respects we will just be adding onto our current portfolios in order to make the merger as smooth as possible. We are not initiating a huge amount of other changes simultaneously because that would become too much of a operational burden.

Apart from completing the merger, other priorities for us in 2010 are to stay on track with our recovery plan - in other words, to keep a close eye on whether the investment policy is executed in line with the plan and to raise the performance towards a more comfortable solvency ratio.

The challenges will come in the form of increased supervision on the operational side and the markets themselves. After the 50% recovery that equities experienced in 2009 we are very pessimistic on the markets in 2010. In fact, we expect the crisis to affect Europe and the US for a very long time, similarly to the impact felt by Japan after the Asian crisis. That is why we recently decided to increase our fixed income exposure over the coming months.

On the operational side, the Dutch regulator has advised pension funds against investments in complex strategies unless there is a sufficient amount of internal capacity to monitor them on a very regular basis. In other words, pension funds are under increased scrutiny from the regulator.

The regulator's focus on risk management of complex strategies also means we do not do tactical asset allocation anymore.

Diversification remains important to us - but has to some extent become less of a focus. It is now clear that there are limits to diversification and so in general for most pension funds the risk of over-diversification is greater than not having enough diversification.

The lesson of 2008 and 2009 has been the importance of a focus on risk both in the policy as well as in the execution and the implementation of the investments.