Press release: Return on pension assets slightly positive during the first half of the year

19.09.2016

Finns’ earnings-related pension assets totalled about EUR 180.3 billion at the end of June. The value of the assets rose by EUR 2.4 billion during the second quarter of the year,

thanks to the positive return trend in that quarter. However, owing to the modest returns in the first quarter, the figures for the first six months of the year were only slightly positive (nominal rate of return 0.3%, real rate of return -0.1%). This is revealed by the statistical analysis conducted by the Finnish Pension Alliance TELA.

Nearly half of the assets, roughly EUR 83.6 billion (46.3%) was invested in equities and equity-like instruments. Fixed-income investments accounted for about EUR 81.9 billion (45.4%) and real estate investments for about EUR 14.9 billion (8.3%).

The situation on the financial market improved slightly during the second quarter, as the central banks continued their stimulating monetary policy and reasonably good financial figures were published, for instance in the United States and China, says Peter Halonen, analyst at TELA.

“On the other hand, the stimulating monetary policy and the resulting low interest rates have kept the investment environment challenging, especially for fixed-income investments. Brexit, in turn, hit equities particularly hard during the second quarter and has increased both economic and political uncertainty.”

Pension assets invested with the sights set decades ahead

At present, about one sixth of Finns’ earnings-related pensions are financed by investment assets and their returns. Halonen emphasises that, from the viewpoint of how pensions are financed, the most important feature is the long-term trend.

When making sustainability calculations, the Finnish Centre for Pensions uses 3.5 per cent as the assumption for real return on pension assets. In the long term of just under 20 years, the real return of pension funds has been 4.1 per cent when the impact of inflation is taken into account.

“The examination period is really a major factor when looking at the return trend of pension assets. After the financial crisis, uncertainty has increased and returns show a wider range of variation than before,” Halonen explains.

The world’s largest global pension funds remain around zero

For the statistics compilation period of just under 20 years, the real return on investments during the first 10 years was 5.7 per cent. One factor contributing to this trend was the upswing in the domestic economy in the late 1990s During the latter period of just under 10 years, the real return on pension assets has been 2.4 per cent.

“Last year the returns of the world’s largest pension funds, for instance in Japan, Norway, the Netherlands and the United States were around zero. This reflects the difficulties in the global market situation; we operate in the same investment environment,” Halonen points out.

However, Finnish pension insurers constantly strive to seek new, profitable investments, Halonen states.

“For as long as the return on investments exceeds the growth rate of the wages and salaries sum in the long term, it pays to invest pension assets and to cover some pensions with the returns yielded by the investments. In this way, pensions can be financed at lower pension contributions than without the investments in funds.”

At the end of the second quarter, 52.5 per cent of the earnings-related pension assets were invested outside the euro area, while 27.0 per cent was invested in Finland and 20.5 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 Central Church 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 within the next few weeks.

Additional information:

Peter Halonen, Analyst, tel. +358 40 585 0450