Press release: Increase in pension assets a positive surprise in the third quarter

19.12.2016

Finns’ earnings-related pension assets totalled EUR 184.5 billion at the end of September. Despite the challenging market conditions, authorized pension providers managed to obtain good returns on their investments during the third quarter. The amount of assets increased by EUR 4.3 billion in the third quarter. These data are revealed by the statistical analysis conducted by the Finnish Pension Alliance TELA.

“Financial markets calmed down surprisingly quickly after the Brexit shock. This was seen the most clearly on stock markets, which yielded the best returns,” says Analyst Peter Halonen of TELA.

Nearly half of the assets, roughly EUR 88.1 billion (47.8%) was invested in equities and equity-like instruments. Fixed-income investments accounted for about EUR 81.4 billion (44.1%) and real estate investments for about EUR 14.9 billion (8.1%).

Pension assets rose to the highest level ever. Especially in view of the financing of future pensions, growth is always good news. However, in relative terms, pension expenditure has increased more rapidly than pension assets so far. Pension assets are put into funds and invested because some of the financing needed for pensions is covered by these assets. Thus, pension contributions can be kept lower than what the pension expenditure would require. At present, investment assets cover nearly a quarter of the annual expenditure on pensions paid to private-sector wage-earners. In the future, the share will be even larger.

“Pension expenditure will rise markedly over the next 15 to 20 years. If the intention is to use investments to finance at least the current share of the expenditure, assets must increase in step with expenses in the long run” says Halonen.

One quarter or past returns are no indication of the sustainability of the pension system

In response to weak investment prospects and, especially, to the low interest rates, the Finnish Centre for Pensions lowered the projected real return used in the sustainability calculations of the earnings-related pension system from 3.5 per cent to 3.0 per cent for the next ten years.

“The conditions on markets are challenging at present, but pension insurers were now able to secure a real return of 3.0 per cent,” says Halonen.

“However, it is not meaningful to assess investment returns by examining a single quarter or even one full year. Nor is the past a guarantee of future returns.”

The examination period has a major impact on what returns look like. For the past ten years, the real return has been 3.0 per cent. In 2001–2015 it was 3.4 per cent, while in 1997–2015 it was 4.2 per cent.

“However, investment returns are not the only factor when considering the sustainability of the pension system. Finland’s economic growth and employment play a more important role. They determine how much of the assets needed for financing pensions is obtained from pension contributions,” Halonen points out.

Financing of pensions on a solid foundation

When the situation on the market is uncertain, it helps that the authorized pension providers have good solvency. The solvency ratio describes the risk-bearing capacity of private-sector pension insurers and indicates how well they have prepared for instability.

“The solvency of pension providers was strong at the end of September. As a result, pension assets are safe, and low returns do not immediately provoke a state of alarm among pension insurers,” Halonen says.

Solvency rules only limit the risk-taking of private-sector pension insurers. In the public sector, the governing bodies of pension insurers steer investment activities by deciding on the limits within which investments can focus on different investment types.

Investments outside the euro area have been on the rise in recent years. Underlying this trend is the need to diversify investment risks more efficiently than before. At the end of the third quarter, about 53.2 per cent of the earnings-related pension assets were invested outside the euro area, while 26.4 per cent was invested in Finland and 20.3 per cent in the rest of the euro area.

TELA’s statistical analysis concerning 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 more detailed analysis describing the amount and allocation of investment assets will be published in January 2017.

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.