Investment Strategy

The State Pension Fund’s ambition is to be a valued and successful pension investor whose activities are characterised by a high standard of professional skill and ethical conduct. At the same time, the Fund seeks to clarify and promote its corporate image as an independent portfolio investor.

In its operations, VER is called upon to ensure the security, return and convertibility of its investments as well as their due diversity and distribution. Investments have been spread and diversified as customary in the employment pension system.

VER is a long-term investor serving as a buffer fund whose returns may fluctuate sharply over short time spans. All investment decisions are based on target return and the yield potential offered by prospective investments with due regard to the risk involved. Risks are spread by investing in different asset classes, markets, industries, instruments, companies, sovereign bonds and maturities.
 

Objectives of the investment activities

According to the target return established for VER by the Ministry of Finance, the investments are to generate a higher rate of return than an alternative investment considered risk-free from the state’s point of view.‘Risk-free alternative’ refers to the cost of the state’s net debt, including the cost of derivative contracts made as part of debt management. Here, ‘net debt’ refers to the difference between the state’s budgeted debt and cash reserves. The return on VER’s investment activities, when adjusted for risk, must exceed the return of the benchmark specified in the fund’s investment plan.

According to the State Pension Fund Act, VER’s target funding ratio is 25 per cent of the state’s pension liabilities. The fund is grown until the level equivalent to this target is achieved. Whether this goal is achieved or not is determined by return on investments, pension contributions and transfers to the government budget.

One of the requirements for good overall returns is a comprehensive network of partners. This means that VER actively networks with the management of companies in which it invests, as well as with public authorities, Finnish and foreign providers of investor and brokerage services, and other European pension investors.
 

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Investment plan

Every year, VER draws up an annual investment plan. It defines the strategic allocation of the portfolio meaning how the investments are divided between the various asset classes. The goal is to create an optimum investment portfolio that generates a maximum return at the selected risk level. The investment plan and policy are subject to confirmation by VER’s Board of Directors.

Anticipated rates of return and risk levels are determined for the various asset classes and the entire portfolio using a scenario analysis with due regard to market rates and changes in risk premiums as well as correlations over time in each asset class. The strategic allocation is continuously monitored and can be adjusted in accordance with market changes by Board decision, within the given risk limits. Changes to the strategic allocation require adjustments to the fund’s investment strategy.
 

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VER’s benchmark indexes

The steering of VER’s investment activities and the assessment of success are partly based on benchmark indexes representing the average market performance of securities. The indexes are specified in the annual investment plan approved by VER’s Board of Directors. The following benchmark indexes to which the performance of investments are compared have been determined for each asset category. 

 

FIXED INCOME INVESTMENTS 45 %
Liquid fixed income investments
Government bonds EFFAS Germany Government 1-7 Yr Index
BBG USA Sovereign Bond Index
BBG Eurozone Sov ex Greece Index
BBG Finland Sovereign Bond Index
Barclays Euro Government Inflation-linked Bond Index
Corporate bonds BBG EUR IG European Corporate Bond Index
BBG EUR HY Corporate Bond Index
Emerging market debt JP Morgan EMBI Global Diversified Eur Hedged
JP Morgan CEMBI Broad Diversified
JP Morgan GBI-EM Diversified EUR Unhedged (Local CCY)
Money markets JP Morgan Cash Index 3 Month
   
Other fixed income investments
Private credit funds Benchmark for corporate bonds + 200 bps
   
EQUITY INVESTMENTS  44 %
Listed equities
Nordic countries OMX Helsinki Cap Index
OMX Stockholm Benchmark Cap Index
Europe MSCI Europe Index
North America MSCI North America Index
Japan MSCI Japan Index
Emerging markets MSCI Emerging Markets Index
   
Other equity investments
Private equity funds (50 % Stoxx Europe 600 Hedged EUR + 50 % Stoxx Europe 600 (Net Return) Index EUR) + 300bps / 36 kk k.a.
   
OTHER INVESTMENTS  11 %
Real estate funds INREV Quarterly Index (LOC)
Infrastructure funds INREV Quarterly Index (LOC)

Hedge funds and
risk premium strategies

HFRI FoF Composite Index + 0.9 %