Interim report of the State Pension Fund 1 January–31 September 2016

Published 2016-10-27 at 10:13

The return on the investments made by the State Pension Fund (VER) reached 4.4 per cent during 1 January–30 September 2016. The return during the third quarter was 3.5 per cent.

Of the large assets classes, liquid fixed income instruments generated a return of 4.9 per cent and listed equities 4.1 per cent during the three quarters.

VER’s average rate of return is 7.7 per cent for the past five years and 4.6 per cent for the past 10 years, while the equivalent real return was 6.7 per cent (5 years) and 2.9 per cent (10 years).

At the end of September, the market value of the Fund’s assets amounted to EUR 18.5 billion (EUR 17.9 billion on 31 December 2015). Fixed income instruments accounted for 48.1 per cent, equities for 42.0 per cent and other investments for 7.8 per cent of VER’s all investments.

“VER’s return on investment, generated more or less equally by all asset classes, was sound during the first three quarters. What in particular exceeded expectations was the five percent return on fixed income instruments as interest rates kept falling and risk premiums decreasing. The investments in the emerging markets, in particular, generated healthy returns both on equities and fixed income portfolios,” says Managing Director Timo Viherkenttä.

“The third quarter was characterised by a strong recovery of the equity markets as the uncertainty created by the Brexit vote was quickly replaced by new optimism. After the strong July, movements both in the equity and fixed income markets remained relatively modest despite the uncertainties affecting the investment climate. Developments in the currency markets have been dominated by the fall of British sterling.

“Investors are currently focusing on issues related to political developments both in the United States and Europe – along with ever-present central bank speculations,” Viherkenttä concludes.

During January-September VER’s premium income amounted to EUR 1,145 million while a total of EUR 1,338 million was transferred to the government budget. Under the law, VER is required to contribute to the government’s annual budget an amount equivalent to 40 per cent of the state’s total pension expenditure. The amounts to be transferred increase continuously with the growth in pension expenditure.

Relatively speaking, the state’s pension liabilities have been pre-funded to a lesser extent than in the private and municipal sector. At the end of 2015, the state’s pension liabilities amounted to EUR 95.7 billion, while the funding ratio was 19 per cent. Under the law, the State Pension Fund will be grown until its assets cover 25 per cent of the state’s pension liabilities.



Liquid fixed income investments

The return on liquid fixed income instruments was 4.9 per cent.

After a jittery start, the interest markets performed very well during the first three quarters of the year. Only the victory of the voters in favour of leaving the EU in the UK referendum caused a temporary rise in volatility towards the end of June, but the rise in the interest rates of even the most risk-exposed fixed income investments remained short-lived.

The ECB’s decision in March to lower its interest rate and increase asset purchases and extend them to euro-denominated investment-grade company bonds buttressed the corporate bond market and Eurozone government bonds. Most government bonds and a substantial percentage of credit-rated company bonds carried a negative interest rate in Europe. The record-low interest rates in the Eurozone caused investors to turn their attention to the emerging markets, while the dovish statements of the U.S. central bank (FED) and the sharp increase in the price of oil gave an additional boost to these markets. Over a period of six weeks in June-August, the inflows to emerging market fixed income funds reached nearly EUR 17 billion, representing the three biggest weekly changes in the data reported since 2004.

The up-beat development of the fixed income markets levelled off during September in anticipation of the U.S. presidential elections and the FED’s interest rate hike.

Other fixed income investments

Other fixed income investments include investments in private credit funds.

The private credit investments yielded a 1.2 per cent return.

The market conditions for private credit funds have remained favourable even though the slightly intensified competition is reflected in the margins. At the same time, investors are taking a keener interest in this asset class, which may signal stiffer competition in the future and affect prices negatively.


Listed equities

The return on listed equities was 4.1 per cent. 

Exceptional fluctuations were experienced in the global equity markets during 2016. The year started on a highly jittery note and the world equity markets plummeted during the first six weeks of the year. This was followed by a general recovery which was sustained until mid-April.  In May, the equity markets played up again, but the biggest blow was received mid-summer when the result of the UK referendum on the EU was announced. The victory of the Brexit camp came as a big negative surprise to the markets. For the next few days, large daily fluctuations occurred in the world equity markets. However, the markets recovered from this shock surprisingly quickly, with equities performing strongly again as early as July. The rest of the third quarter went smoothly and VER’s equities portfolio was back in the black by the end of the reporting period.

Other equity investments

Other equity investments consist mainly of investments in private equity funds and unlisted stock. The portfolio also includes investments in exchange-traded real estate funds.

Private equity investments returned 6.9 per cent and unlisted equities 7.6 per cent. The return on listed real estate funds was 12.6 per cent.

The fluctuations in the equities market were not much reflected in returns on private equity funds. Valuation levels remained relatively high, and the funds succeeded in making use of the market conditions to time exits. Underlying the returns on unlisted equities was the sound financial performance of real estate companies. 


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

The return on real estate funds was 4.3 per cent while infrastructure investments yielded 8.9 per cent.

In the real estate markets, the impact of the Brexit vote has so far remained limited and the returns on the funds continued to climb during the reporting period. Highly successful exits were made in infrastructure investments, with the dividends earned on the investments contributing to hefty returns.

Hedge funds returned -0.9 per cent. Funds’ risk appetite was restored in July after Brexit-related adversities. Moreover, the stock selection environment improved during the third quarter. The market sentiment influenced by central banks proved difficult for macro funds.

Risk premium strategies yielded a return of 6.0 per cent. Currency market strategies, particularly the carry model, yielded the best returns during the reporting period.





Investments, MEUR (market value)

18 458

17 853

Fixed income investments

8 886

8 747

Equity investments

7 755

7 687

Other investments

1 445

1 348


Breakdown of the investment portfolio

Fixed income investments

48,1 %

49,0 %

Equity investments

42,0 %

43,1 %

Other investments

7,8 %

7,6 %




Return on investment

4,4 %

4,9 %

Fixed-income investments

Liquid fixed income investments

4,9 %

0,2 %

Other fixed income investments

1,2 %

7,1 %

Equity investments

Listed equity investments

4,1 %

10,3 %

Private Equity investments

6,9 %

18,6 %

Other investments

Real Estate funds

4,3 %

9,5 %

Infrastructure funds

8,9 %

11,7 %

Hedge funds

-0,9 %

2,5 %


Pension contribution income, MEUR

1 145

1 659

Transfer to state budget, MEUR

1 338

2 263

Net contribution income, MEUR



Pension liability, MEUR


95 700

Funding ratio


19 %

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