Recommendations of the committee led by Kari Puro, president and CEO of Finland’s €21bn Ilmarinen, look set to allow the increase of local pension institutions’ equity exposure.

The committee, which published its report in late January, has been evaluating the reform needs of the existing regulatory framework for pension institutions since the autumn of 2004.

According to Kari Puro, the most important recommendation of his committee was to introduce an increased buffer, which balances the risk that derives from fluctuations in the stock markets.

“The buffer will enable the gradual expansion of equity portfolios from 25 per cent to 35 per cent over the coming five years. We believe that increased exposure to equities will increase the level of returns, and keep the pressure to increase contribution rates at bay,” he told nrpn.

In 2005, Finnish pension institutions had already invested some 33 per cent of their portfolios in equities due to favourable market conditions.

The committee also recommended unifying solvency regulations for all pension institutions, and updating and simplifying them. Despite the debate on the pros and cons of domestic investments, the committee refrained from making recommendations on a minimum level for domestic exposure.

Combating demographics

Mr Puro points out that the recommendations on future investment regulations are only one measure Finland has taken to combat future demographics.

“We have worked hard to find a solution to the problems that the retirement of large age groups and increasing life expectancy cause. In addition to the recommendations on future investment regulations, the pension reform of 2005 has made it tougher to take early retirement. Furthermore, today the longer Finnish employees work, the better pension they get,” he says.

Matti Leppälä, director of international and legal affairs at the Finnish Pension Alliance (Tela), welcomes the recommendations of Mr Puro’s committee.

“The recommendations modernise the current investment regulations governing work pension institutions. At the moment, the rules focus more on the legal than the practical side of investments and often evaluate the risks involved in different asset classes incorrectly. There are also so many new products in the field that the system needed a thorough revamp,” he says.

However, Mr Leppälä also points out that the recommendations are still not fully on par with the prudent person principle. “The proposed changes still do not make the Finnish pension investment regulatory framework as liberal as the prudent person principle used in the Anglo-Saxon world.”

Mr Puro adds that while the recommendations may seem overly careful, his report is a step to the right direction. “Major changes like this require transition periods and careful implementation. We proposed a five-year transition period because we do not want the new regulations to have any adverse affect on the markets. After the five year period the plan is to revise the situation and decide whether investment limits on equities will be relaxed further,” he says.

Mr Leppälä believes that the proposals will have a far-reaching impact on the asset allocation of Finnish pension funds. “Last year Finnish pension institutions invested some 33 per cent of their portfolios in equities. With the recommendations of the committee, this trend is likely to continue.”

Increasing risk

Matti Vuoria, CEO, of €24.6bn Varma mutual pension insurance company, agrees. “The recommendations strengthen the ability to take risk at Finnish work pension companies and improve the opportunities to aim for higher investment returns. We are now able to increase our exposure to equities,” he said.

Etera, the €5.5.bn mutual pension insurance company, already started expanding its equity portfolio in 2005 and appointed multi-manager Russell Investment Group to handle an international equity mandate. “Whereas in the end of 2004 equities and equity related holdings constituted 25 per cent of our main portfolio, now they represent almost one third of it,” Ari Korhonen, CIO at the fund, says.

Mr Korhonen agrees with Magnus Backström, CIO of €1.5bn OP Bank Group pension fund, that the new solvency regulations will place local work pension companies on a more equal foothold than before.

“It now seems possible to get unified regulations for all pension institutions and remove inequality. Also, with regards to solvency requirements the situation seems to be becoming more egalitarian,” says Mr Backström.

At the moment, Mr Puro’s report is being evaluated at the ministry of social affairs and health, which is expected to refer its proposals on the report to the Finnish parliament by the end of April.

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