Annual Report of the State Pension Fund for 2017

Published 2018-02-27 at 14:56

Sound return on investments in 2017

The economic environment developed favourably in 2017. Growth was robust in almost all sectors of the economy. Similarly, the euro area thrived and the Finnish economy was finally able to catch on after a prolonged period of weak performance.

The investment market also did well overall in 2017. In particular, the equity markets performed strongly across the world. Share prices were driven by the growth of the real economy, increasingly positive economic forecasts and improved financial performance by companies. Despite various uncertainty factors, volatility in the equity market was exceptionally low throughout the year. Interest rates remained extremely low although there were some signs towards the end of the year suggesting that the end of the era of record-low interest rates was already looming on the horizon.

At fair values, the total return on the investments made by the State Pension Fund (VER) in 2017 was 6.6 per cent. VER’s average rate of return is 6.4 per cent for the past five years and 5.0 per cent for the past ten years.

The real return in 2017 was 6.0 per cent, which exceeds the long-term average expected return in the pension insurance sector as well as the average rate of return used as a basis for VER’s long-term financing calculations. VER’s 5-year average real return was 5.7 per cent and 10-year real return 3.5 per cent.

According to the objective established by the Ministry of Finance, VER’s long-term return must exceed the average cost of net government debt. Over the past ten years, VER’s average market value weighted rate of return has beaten the cost of net government debt by 2.8 percentage points. Since 2001 when VER’s operations assumed their current form, the total returns earned by VER have exceeded the average cost of government debt by close to EUR 6 billion.

All the asset classes yielded a positive return in 2017. Of the large asset classes, liquid fixed income instruments generated a return of 2.0 per cent and listed equities 11.0 per cent. While the highest return was generated by non-listed equities (23.6%), private equity funds (16.1%) and investments in infrastructure funds (14.8%) also gave healthy returns.

The fluctuations in return in VER’s portfolio remained exceptionally small in 2017 and the Sharpe ratio illustrating risk-adjusted return was uncommonly high at 2.1.

At the end of 2017, the market value of VER’s investment assets stood at EUR 19.6 billion. Of all the investments, fixed income instruments accounted for 40.3 per cent, equities 47.5 per cent and other investments 9.5 per cent of the total. The rest of the effect of risk-adjusted allocation is due to derivatives. For the first time in VER’s history, equities accounted for a clearly greater percentage of investments than fixed income instruments.

Fixed income investments

Liquid fixed income investments

In 2017, the liquid fixed income portfolio returned 2.0 per cent and its risk-adjusted market value at the end of the year stood at EUR 7.7 billion. The duration of the fixed income portfolio remained shorter than the neutral duration of the portfolio for the entire year.

Early in 2017, interest rates in Europe fluctuated strongly because of uncertainties related to politics and the European Central Bank’s future monetary policy. After the political uncertainties abated, there were speculations about the termination of the ECB’s asset purchase programme despite the moderate inflation prospects. At its interest meeting in October, the ECB announced that it will halve its purchase programme from EUR 60 to EUR 30 billion in 2018 and continue purchases at least for another nine months. It was also announced that the first interest rate hike is not to be expected until much later following the expiry of the purchase programme.

In the United States, interest markets were relatively calm despite the rate increases by the Federal Reserve (FED) in March, June and December. The FED started unwinding its balance sheet in October, indicating that it will raise interest rates three times also in 2018. Towards the end of the year, attention focused on the appointment of the FED’s new chair and its effect on interest rates.

Ample liquidity, central banks’ asset purchase programmes, low returns on emerging market sovereign debt, improving economic growth and moderate inflation underpinned the corporate bond and emerging markets. Their interest rates and risk premiums fell extremely low, which was mirrored in the excellent return on emerging market investments and non-investment grade corporate bonds during 2017.

As far as VER’s fixed income investments are concerned, the best return was generated by the emerging bond market. All the sub-portfolios gave a positive return except for the money market portfolio.

At the end of the reporting period, direct investments accounted for 59.0 (61.5) per cent of the entire liquid fixed income portfolio. At the end of the year, fixed income investments were held in 271 (300) debt instruments and fund units in 42 (38) funds.

Other fixed income investments

VER’s other fixed income investments are in private credit funds. Most of the funds in the portfolio are private equity funds investing in non-liquid loans.

As in the previous years, the non-liquid loan markets were lively in 2017. Worrying developments in the market included companies’ rising debt ratios and the increasingly lax terms of the loans extended to major corporations. The annual return on the portfolio in 2017 was 7.3 per cent. During the reporting period, investments (approx. EUR 75 million) were made in two new funds. Unfunded commitments at the end of 2017 totalled EUR 241 (199) million.

At the end of the year, the weighting of private credit investments in the portfolio was 1.0 (1.2) per cent.


Listed equities

The year 2017 proved good for equity investors largely untroubled by major fluctuations so common in the equity markets in the previous years. The return on VER’s portfolio of listed equities and fund units reached 11.0 per cent by the end of 2017. All the equity portfolios showed a positive return at the end of the year, and the best yields on listed equities were earned in the emerging markets.

Compared with the previous years, 2017 was relatively tranquil in the money market. The risk appetite remained high throughout the year, and the equity markets showed no major fluctuations. Listed companies improved their financial performance across the board, which contributed to equity prices. Even though geopolitical tensions intensified, especially in the case of North Korea, they did not undermine the strong risk sentiment. As interest rates remained low, 2017 turned out to be favourable for equities. Admittedly, valuation levels had increased as a result of the positive development of the equity market, even clearly exceeding long-term averages. However, the direct return on equities in the form of dividends is still attractive compared with many other asset classes.

In terms of market capitalisation, the value of the equity portfolio increased from EUR 8.0 billion at the beginning of the year to EUR 8.6 billion at the end. At the end of 2017, direct equity investments accounted for 28.5 (30.2) per cent and fund investments for 71.5 (69.8) per cent of the total. At the end of the year, VER held direct interests in 103 (109) companies and units in 59 (62) funds.

Other equity investments

At the end of the reporting period, VER’s other equity investments included investments in private equity funds, non-listed stock and listed real estate investment trusts (REIT).

The positive development of the equity market contributed to the healthy returns on equity investments in 2017. As a result of successful exits and the improved valuation levels of portfolio companies, the all-year return reached 16.1 (19.0) per cent. The yields were adversely affected, to some extent, by the increases in costs due to new investment commitments (‘J-curve effect’). During the reporting period, investments (approx. EUR 266 million) were made in six new funds. At the end of the year, unfunded commitments totalled EUR 500 (379) million.

Investments in non-listed equities consisted of investments in SATO Plc, Logicor Oy and Suomi Power Networks Oy. At the end of 2017, VER exited from Logicor Oy just like other shareholders. The total return on the portfolio in 2017 was 23.6 (11.4) per cent. At the end of the year, VER purchased the grid company Elenia together with Macquarie Infrastructure and Real Assets and Allianz. The transaction is expected to be completed during spring 2018.

VER has been increasing the weighting of listed real estate investment trusts in its portfolio as of the beginning of 2017. The positive development of the real estate market was also reflected in the returns on REITs. VER’s net investments in listed REITs amounted to about EUR 150 million during the reporting period.

At the end of the year, other equity investments in the portfolio accounted for 3.7 (2.4) per cent of the total.

Other investments

VER’s other investments are in real asset funds (real estate and infrastructure funds) as well as hedge funds and risk premium strategies.

As in the previous years, the real estate market continued to develop favourably, particularly in Europe. The all-year return on real estate investments (inclusive of the return on listed real estate investment trusts) reached 7.4 (11.9) per cent. Three new investments (EUR 191 million) were made in funds, while unfunded commitments at the end of the year totalled EUR 365 (255) million.

The return on infrastructure investments was extremely high as a result of excellent exits from older funds and sizeable dividends. The total return on the portfolio in 2017 was 14.8 (13.8) per cent. An investment (approx. EUR 58 million) was made in one new fund during the reporting period. At the end of the year, unfunded commitments totalled EUR 241 (244) million.

Hedge funds yielded a return of 4.8 (1.0) per cent in 2017. The return accumulated quite steadily throughout the year. The best return was yielded by quantitative funds and funds focusing on corporate restructuring. The reporting period was toughest for emerging market macro funds. The cost of currency hedging ate into the returns considerably as most of the funds were USD-denominated.

The return on risk premiums reached 1.4 per cent in 2017. With risk premium strategies, the year was positive for trend tracking and volatility sales. Value strategies, especially in equities, gave a poor return during the reporting period.

At the end of 2017, the market capitalisation of other investments was EUR 1,860 (1,579) million accounting for 9.5 (8.4) per cent of VER’s portfolio. Of the assets invested, real estate investment trusts accounted for 3.1 (2.9), infrastructure investments 1.2 (1.4), hedge funds 3.6 (3.5) and risk premiums 1.5 (0.7) percentage points.

Responsible investing

VER’s responsible investing policies are based on the UN Principles for Responsible Investment (UNPRI) and UN Global Compact. Another objective is to achieve transparency of responsibility  in VER’s investment activities in all asset classes. VER has been measuring the carbon footprint of its direct equity investments since 2015. In summer 2017, the environmental organisation WWF carried out the first-ever study to determine how leading European investors take into account the Paris Climate Convention’s objectives of limiting the rise in average global temperature to less than two degrees. VER ranked among the top investors in all indicators.

The state’s pension expenditure continues to increase

The State Pension Fund’s role in balancing government finances has grown and will continue to do so. In 2017, the state’s pension expenditure totalled approx. EUR 4.6 billion. As VER contributes 40 per cent towards these expenses to the government budget, the transfer to the 2017 budget amounted to over EUR 1.8 billion. Over the same period, VER received approximately EUR 1.4 billion in pension contributions. Its net pension contribution income has now turned permanently negative, meaning that more money is transferred from VER to the government budget than VER receives in pension contribution income. This gap between income and budget transfers will continue to grow year on year.

In June 2017, the Board of Directors of the State Pension Fund adopted a strategy that defines its long-term objectives in greater detail. The strategy foresees that the 25 per cent funding ratio target specified by law will be attained by 2033, if not earlier. To achieve this, it is imperative that VER’s pension contribution income remains at the estimated level and that the real return on investments remains relatively high. As the state’s pension liabilities amounted to EUR 92.6 billion at the end of 2017, the funding ratio was approx. 21 per cent. Additionally, the strategy sets out the principles by which the risk level and basic allocation of the investment portfolio are derived from the target funding ratio established for VER, with due regard to the long-term target return defined by the Ministry of Finance.


VER’s administration

The State Pension Fund (VER), established in 1990, is an off-budget entity. VER is an investment organisation with a mission to manage the assets entrusted to it. The collection of pension contributions to the state pension system and related duties, like the processing of pension applications and payment of pensions, are handled by the Local Government Pension Institution Keva. VER pays Keva a management fee for these services, which in 2017 amounted to about EUR 17.6 million.

The responsibility for oversight and control of VER’s operations rests with the Ministry of Finance, which is authorised to issue general instructions regarding the organisation of VER’s administration, financial management and the investment of its assets. According to standing instructions, fixed income instruments must account for a minimum of 35 per cent, equities for no more than 55 per cent, and other investments for no more than 12 per cent of the market capitalisation of the portfolio.

VER’s Board of Directors is appointed by the Ministry of Finance. The Board has seven members, three of whom are appointed from candidates proposed by central staff organisations. The Chair of the Board of Directors is Jukka Pekkarinen and the Chair of the Investment Consultative Committee Eva Liljeblom.

In 2017, VER’s operating costs amounted to EUR 7.0 million, which represents 0.04 per cent of the average annual capital. At the end of the year, VER had 24 employees. The CEO is Timo Viherkenttä. VER invests in human resources by maintaining and developing the professional skills of the staff, which is important both in seeking maximum returns on investments and in managing risks.

Key figures for 2017




Return on investments, %

6,6 %

6,7 %

Real return, %

6,0 %

5,6 %




Return by asset class, %



Fixed income investments



  Liquid fixed income investments

2,0 %

4,0 %

  Other fixed income investments

7,3 %

2,4 %




  Listed equities

11,0 %

9,7 %

  Other equity investments

15,6 %

9,6 %

Other investments



  Real estate funds

7,4 %

11,9 %

  Infrastructure funds

14,8 %

13,8 %

  Hedge funds

4,8 %

1,0 %

Expenses for investment activities (as % of average capital)

0,04 %

0,04 %




Average returns

5 years

10 years

Average return on portfolio p.a.

6,4 %

5,0 %

Average real return p.a.

5,7 %

3,5 %

Average effective interest rate on government debt p.a.

1,6 %

2,2 %




Portfolio allocation



Total investments, EURm

19 586,2

18 767,1

Fixed income investments, %

40,3 %

46,0 %

  Liquid fixed income investments, %

39,2 %

44,8 %

  Other fixed income investments, %

1,0 %

1,2 %

Equity investments, %

47,5 %

45,0 %

  Listed equities, %

43,8 %

42,6 %

  Other equity investments, %

3,7 %

2,4 %

Other investments, %

9,5 %

8,4 %

  Real estate funds, %

3,1 %

2,9 %

  Infrastructure funds, %

1,2 %

1,4 %

  Hedge funds, %

3,6 %

3,5 %

  Other, %

1,5 %

0,7 %




Key figures




3,3 %

7,2 %

Sharpe ratio






Other key figures



Pension contribution income, EURm

1 427

1 498

Budget transfers, EURm


1 790

Net contribution income, EURm



Balance sheet total, EURm

15 300

15 005

Pension liabilities, EURm

92 600

93 000

Funding ratio, %

21 %

20 %


Additional information is provided by CEO Timo Viherkenttä,, tel.: +358 (0)9 2515 7010.

Established in 1990, The State Pension Fund of Finland (VER) is an off-budget fund through which the state prepares to finance future pensions and equalise pension expenditure. VER is an investment organisation responsible for investing the state’s pension assets professionally. At the end of 2017, the market value of the Fund’s investment portfolio stood at EUR 19.6 billion.