Press release: Earnings-related pension assets rose by EUR 7.6 billion last year – this growth helps ensure future pensions

15.03.2017

Finns’ earnings-related pension assets totalled EUR 188.5 billion at the end of 2016. Although the year was challenging from the investor’s perspective, authorized pension providers were able to obtain good returns towards the end of the year. Assets rose by EUR 4 billion during the last quarter. When compared against the end of 2015, assets increased by a total of EUR 7.6 billion. These data are revealed by the statistical analysis conducted by the Finnish Pension Alliance TELA.

“Financial markets recovered surprisingly well, especially after the political surprises and other uncertainty factors experienced during the year,” says Analyst Peter Halonen of TELA.

“Fears of China’s economic slowdown, Brexit, Trump and other political tensions, as well as the weak financial position of some European banks, brought turbulence to financial markets. On the other hand, central banks continued their liberal monetary policy, which for its part supported a positive trend in the real economy and on the market,” Halonen explains.

In the last quarter of the year, the best returns were obtained from the equity market. Altogether EUR 95.2 billion (50.5%) of the assets was invested in equities and equity-like instruments. This share exceeded 50 per cent for the first time. Fixed-income investments accounted for about EUR 77.8 billion (41.2%) and real estate investments for about EUR 15.4 billion (8.2%).

Funds are increased to ensure future pensions and a reasonable level of pension contributions

TELA’s investment statistics date back 20 years now. The examination period has a major impact on what returns look like. Over the 20-year period, the real return on investments has been 4.3 per cent. When examined over the past ten years, the real return was 2.8 per cent. If the examination period is only the year 2016, the return was 5.0 per cent.

More relevant than the return on investments is to examine the expenses of the pension system and their financing over the long term. Pension assets are put into funds and invested because some of the financing needed for pensions is covered by these assets. Thanks to the good return on investments, pension assets are now at the highest level of all times.

“Growth is always good news, especially from the viewpoint of future pensions. After all, pension expenditure is permanently higher than the sums that can be collected into the system through pension contributions. This, in turn, lowers the total amount of pension assets,” Halonen explains.

“The volume of pension assets indicates that Finland has prepared well for population ageing and rising pension expenditure. In the future, we shall need to rely on the funds increasingly often.”

From this time forward, pension assets must increase on average at the same rate as the sum of wages and salaries and pension expenditure. Then it will be possible to finance a steady share of the pension expenditure by using the returns on investments. At the same time, it will be possible to keep the earnings-related pension contributions permanently at a level lower than what the pension expenditure would require. At present, investment assets and their returns cover nearly a quarter of the annual expenditure on pensions paid to private-sector wage-earners.

“Finland’s economic growth and employment trend are crucial for the sustainability of the pension system. They determine how much of the assets needed for financing pensions is obtained from pension contributions,” Halonen points out.

Pension assets build a buffer against uncertain financial markets

At the same time as pension expenditure keeps increasing, we can expect that the future investment environment will yield lower returns than before.

“From the investor’s point of view, the year 2017 has a number of uncertainty factors. Concerns include the indebtedness of the world economy and the possibility of political crises in the euro area,” Halonen lists

“The solvency of authorized pension providers in 2016 was good. Solvency is an indication of the pension provider’s buffer in case of occasional market fluctuations. It also regulates what kind of risks the pension provider can take in its investments.”

In the private sector, investments by pension providers are regulated by statutory solvency requirements. In the public sector, the administrative bodies of pension providers steer investment activities.

TELA’s statistical analysis with regard to pension assets comprises data on investments made by pension insurance companies, industry-wide pension funds, company pension funds, the pension liability fund for the employees of the Social Insurance Institution, Keva, the Church Pension Fund, the Farmers’ Social Insurance Institution, the Seafarer’s Pension Fund, the Pension Institution of the Bank of Finland and the State Pension Fund. The statistics only cover the statutory earnings-related pension assets.

The series of graphs illustrating the short-term and long-term trends of pension assets are published on the page “Investment assets trend”. A complete analysis of the amounts and allocation of investment assets will be published in the coming weeks on the Investment Analysis page of TELA.

Additional information:

Peter Halonen, Analyst, tel. +358 10 680 6731

The Finnish Pension Alliance TELA looks after the interests of all authorized pension providers operating in Finland. TELA’s membership comprises all insurers providing statutory earnings-related pensions.