Weighting coefficients of share indices used by private-sector pension providers for predicting the equity-linked buffer (OLV).

In accordance with the legislative amendments that entered into force at the beginning of 2007, private-sector pension providers took into use the concept ‘equity-linked buffer’ (or OLV) when calculating their liability.

The change in OLV is calculated after each quarter for the whole pension liability on the basis of the actual average rate of return on quoted shares included in investments made by private-sector pension providers for the same quarter. Only shares quoted on the stock exchanges of the OECD/EEA region are included in the calculation. Pension providers classify these investments into investment category IV.1 in accordance with Section 10 of the Act on solvency and coverage, which entered into force at the start of 2007.

When the average return is calculated, the weight given to an individual pension provider’s share investments is at most 15 per cent. After each quarter, the Finnish Centre for Pensions collects data from authorized pension providers to calculate the final liability. In addition to the rate of return, the data collected include information on tied up capital.

For the real-time determination of pension providers’ liability, the above rate of return on shares must be estimated for the current quarter and the quarter just ended, on which the collection and processing of the final data have not yet been completed.

According to the position taken by TELA’s Advisory Committee for Calculation Criteria Affairs, estimation must be made using a weighted share index whose relative change (as a percentage) is determined with sufficient accuracy to predict the rate of return used in the final calculation of the OLV. TELA’s Investment Reporting Group decided to recommend a weighted index covering four regions.

The data needed for weighting indices are collected at the same time as material for TELA’s quarterly statistics; thus, the weights are updated four times a year. The Investment Reporting Group monitors how well the index predicts the actual return for each quarter.