Favourable start to the year 2017 for The State Pension Fund of Finland

Published 2017-04-27 at 14:49

Investment environment

On the whole, the investment markets developed favourably in early 2017. Globally, the real economy was on a growth track, which was also reflected on the investment environment. The forward-looking indicators, in particular, were highly positive in many industries, but even the actual development was encouraging in many respects.

From the point of view of the investment market, the essential thing was that the favourable economic development did not yet seem to lead to any tightening of central bank policies, even though a reversal had already taken place in the United States.

The markets closely linked to the investors’ risk appetite – in particular equities and investments in emerging market fixed-income instruments – continued to perform positively as in the previous year.

VER’s returns on investments

Future monitoring and evaluation of the State Pension Fund’s investment activities will increasingly focus on long-term outcomes and future prospects instead of quarterly reporting. However, VER will continue to post quarterly figures and comments to the same extent as previously.

On 31 March 2017, VER’s investment assets totalled EUR 19.2 billion. In the first quarter, the return on investments at fair values was 3.0 per cent. The average nominal rate of return over the past five years (1 April 2012–31 March 2017) was 6.9 per cent and the ten-year return 4.7 per cent.

The real rate of return was 3.1 per cent. VER’s five-year average real return was 6.1 per cent and 10-year real return 3.1 per cent.

From the state’s point of view, it is pertinent to compare the return on investments also to the average cost of net government debt because the funds accumulated in preparation for future pension expenditure can be deemed to reduce such debt. Over the past ten years, VER’s average rate of return has beaten the cost of net government debt by 2.2 percentage points. Since 2001 when VER’s operations assumed their current form, the total market-value returns earned by VER have exceeded the average cost of government debt, calculated for the equivalent capital and time period, by over EUR 5 billion.

VER measures the success of its investment activities using several indicators. A simple way, adopted by VER, for assessing return relative to overall market development is to compare the actual return to a global index in which the weight of both equities and currency-hedged bonds is 50 per cent.

A closer look at January–March 2017

During the first quarter, liquid fixed-income instruments generated a return of 1.0 per cent and listed equities 5.7 per cent. Of the other asset classes, private equity investments returned 3.7 per cent, hedge funds 1.6 per cent and risk premiums 1.6 per cent.

At the end of March 2017, the market value of the Fund’s investment portfolio stood at EUR 19.2 billion. Of the investments made by VER, fixed income instruments accounted for 45.4 per cent, equities 44.4 per cent and other investments 8.2 per cent of the total.


Liquid fixed-income investments

The return on liquid fixed-income instruments was 1.0 per cent.

While interest rates increased sharply in early 2017, they fell back to the year-end level in February as political instability supported interest rates particularly in Germany with the two-year rate reaching an all-time low of -0.97 per cent. Political instability was mainly due to the general elections in France and the Netherlands. A victory of the ultra right was feared in both countries. In March, the interest rates in Europe rose again amidst speculation that the European Central Bank would raise the interest rate on the deposit facility before the expiry of the bond purchase programme. However, towards the end of the month interest rates started falling as inflation expectations dwindled and the ECB rebuffed rumours of plans to raise interest rates.

In the United States, interest markets were relatively calm despite the rate increase by the Federal Reserve (FED) in March. The interest-rate path as well as the inflation and economic forecasts released by the FED remained practically unchanged.

The best return on liquid fixed-income instruments was offered by the emerging markets.

Other fixed-income investments

Other fixed-income investments include investments in private credit funds.

The private credit investments yielded a 1.8 per cent return.

The market conditions for private credit funds remained favourable in Europe. With curtailed lending by banks, private funding continued to account for a greater share of the financing of SMEs. In reality, VER’s first-quarter returns on private credits consisted of updated year-end returns on the funds.


Listed equities

The return on listed equities was 5.7 per cent.

The first quarter of 2017 favoured VER’s investments in listed equities. The risk sentiment remained high throughout the quarter despite all the uncertainty factors with the most high-risk asset classes, such as equities, giving a healthy return. VER earned the best returns on emerging market equities, but other equity markets also yielded a sound return during the first quarter.

At the same time, the extended bull market in equities increased valuation levels that are now clearly elevated as shown by several indicators. Despite the soaring prices, the equities market continues to offer relatively attractive ongoing returns compared to many other asset classes.

Other equity investments

VER’s other equity investments include investments in private equity funds and unlisted equities.

Private equity investments returned 3.7 per cent and unlisted equities 3.8 per cent.

The returns on private equity funds in the first few months of the year consist of updated year-end returns. Underlying the positive returns are the favourable development of the equity market and successful exits at the end of 2016. The returns on unlisted equities reflect the positive development of real estate companies.


VER’s other investments consist of investments in real estate, infrastructure, hedge funds and risk premium strategies.

The return on real estate funds was -0.2 per cent, while infrastructure investments yielded 0.9 per cent.

With real estate and infrastructure investments, the first few months of the year were spent in anticipation of future earnings, just as in the preceding years. The European real estate market continued to develop favourably during the early part of the year with no signs of overheating. No significant changes took place in either portfolio during the first few months of the year.

Hedge funds yielded a return of 1.6 per cent in the first quarter. Overall, all the strategies performed well during the reporting period. The best return was generated by macro funds that invest in emerging markets.

Risk premium strategies yielded a time-weighted return (TWR) of 1.9 per cent. Carry and value strategies gave a moderate return except for equities. For momentum strategies, the period was challenging, which was seen in the converging structures of commodity markets in particular.

Average five-year returns on asset classes

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. During the first quarter of 2017, the state’s pension expenditure amounted to approximately EUR 1,142 million. As VER contributes 40 per cent towards these expenses to the government budget, the transfer to the 2016 budget amounted to approximately EUR 457 million. The estimated pension contribution income due to VER over the same period was EUR 338 million. Its net pension contribution income has now turned permanently negative, meaning that more money is transferred by 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 and slow down the growth of the Fund.

In June 2016, 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 good. At the end of 2016, the state’s pension liabilities amounted to EUR 93 billion and the funding ratio exceeded 20 per cent for the first time in history. 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.






Investments, MEUR (market value)

19 223

18 767

Fixed-income investments

8 729

8 640

Equity investments

8 536

8 445

Other investments

1 585

1 579


Breakdown of the investment portfolio

Fixed-income investments

45,4 %

46,0 %

Equity investments

44,4 %

45,0 %

Other investments

8,2 %

8,4 %




Return on investment

3,0 %

6,7 %

Fixed-income investments

Liquid fixed-income investments

1,0 %

4,0 %

Other fixed-income investments

1,8 %

2,4 %

Equity investments

Listed equity investments

5,7 %

9,7 %

Private Equity investments

3,7 %

9,0 %

Other investments

Real Estate funds

-0,2 %

11,9 %

Infrastructure funds

0,9 %

13,8 %

Hedge funds

1,6 %

1,0 %


Further information:

Inquiries: CEO Timo Viherkenttä tel.: +358 9 2515 7010.

Established in 1990, the State Pension Fund (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. The market value of the Fund’s investment portfolio stood at EUR 19.2 billion at the end of March 2017.

All figures presented in this interim report are preliminary and unaudited.