State Pension Fund’s role in balancing central government finances growing

Published 2015-02-26 at 13:31

State Pension Fund’s role in balancing central government finances growing

At the end of 2014, the market value of the State Pension Fund’s (VER) assets amounted to EUR 17.6 billion (EUR 16.3 billion in 2013). The transfers to the state budget exceeded the pension premiums received. Over the coming years, the Fund will alleviate the cost pressures on state pension expenditure. The return on the investments made by VER reached 7.8 per cent in 2014 (6.4 per cent in 2013).

The ageing of the population highlights the importance of prefunding pension expenditure. Finland will feel the impact of this demographic change earlier than other countries in western Europe. The challenging age structure is reflected on consumer demand, the supply of labour and public finances in the form of increasing challenges. A number of significant changes are being made to the Finnish pension system, which are due to take effect during the next few years.

As a result, the State Pension Fund’s role in balancing central government finances will grow. In 2014, VER’s net premium income was slightly negative, which means that the Fund contributed more to the state budget than it earned in premiums. Balancing the cost burden represented by state pension expenditure has been VER’s key mission which will only increase in importance in the future. Over the next few years, transfers to the government budget are expected to increase considerably. VER will be called upon to contribute towards covering the state’s pension expenditure with substantial amounts at or about the year 2030 when it peaks.

VER’s total net premium income in 2014 reached EUR 1,712 (1,634) million. When the the EUR 1,728 (1,678) transfers to the state budget are subtracted, VER’s net premium income falls to EUR -16 (-45) million.

The economic environment continued to be challenging during 2014: growth in Europe was sluggish and no significant turn for the better took place. Reflationary monetary policies and extremely low interest rates made it possible for pension investors to earn healthy returns during the year.

The total rate of return on VER’s investments in 2014 was 7.8 per cent. Fixed-income instruments generated a return of 4.9 per cent, equities 11.7 per cent and alternative investments 7.8 per cent. VER achieved its long-term target return, which is to earn a higher rate of return than an alternative investment considered risk-free from the state’s point of view, in other words the cost of net government debt. VER’s average annual return over the preceding ten-year period (2005–2014) was 5.5 per cent while the average effective cost of government debt over the same period was 3.0 per cent. The real ten-year return was 3.5 per cent while the average nominal five-year return was 6.8 per cent.

On 18 June 2014, the Ministry of Finance issued a new regulation regarding investment activities by the State Pension Fund. It gives greater latitude for allocating investments and underlines the principle of risk-adjusted return in portfolio management. In response to the new policy, a number of adjustments were made to the organisation and the incentive scheme in the autumn. The changes, due to be implemented gradually, are designed to focus resources on risk-adjusted return.

At the end of 2014, the Board of Directors decided to establish a new function – Position Management and Diversified Investments. Its objective is to centralise investment activities with a view to risk-adjusted return and permit more efficient use of derivatives.


Maarit Säynevirta, Acting Managing Director, tel. +358 (0)9 2515 7027 or +358 (0)50 369 9972


Year 2014 in brief

Fixed-income investments

Overall, the return on the fixed-income portfolio was good in 2014. It generated a return of 4.9 (-1.6) per cent and its value in terms of market capitalisation increased from EUR 8.4 billion at the start of the year to EUR 8.8 billion at the end. At the end of 2014, fixed-income investments accounted for 50.4 per cent of VER’s total investment portfolio. The duration of the fixed-income portfolio remained shorter than the neutral duration of the portfolio for the entire year.                                                                                                  

The highest returns during the reporting period were generated by dollar-denominated emerging market debt and long-term peripheral debt. The allocation of the fixed-income portfolio was adjusted only moderately during the year because it was felt to be important to keep the risk level unchanged relative to the beginning of the year. The money market and government bond portfolio was kept overweight and the emerging market and corporate bond portfolio underweight during the reporting period.

As far as direct investments are concerned, VER invests primarily in government bonds, Investment Grade corporate bonds and money market instruments. Other investments are made in funds. At the end of the reporting period, direct investments accounted for 73.0 (71.0) per cent of the entire fixed-income portfolio. At the end of the year, VER held direct fixed-income investments in 199 (205) debt instruments and fund investments in 34 (31) funds.


The return on VER’s portfolio of listed equities and equity funds was good in 2014 reaching 11.7 (18.2) per cent. By far the highest returns were earned on investments in the U.S. stock market thanks to the strengthening of the U.S. dollar. The total net worth of the stocks and shares sold during the year was EUR 252 million. At the end of the year, equities accounted for 39.5 per cent of the portfolio.

Equities generated a healthy return in 2014. However, there was a lot of fluctuation in the share market as the year 2014 in general was quite turbulent for equity investors. With the Ukrainian crisis, the geopolitical tensions in the neighbouring areas reached a new level – the impact of the conflict is already visible, for example in the Finnish economy. In other areas as well, economic growth in Europe remained less vigorous than expected; the ECB and other institutions were fervently looking for ways to give a boost to economic growth. Compared to Europe, the situation in the United States is far better with companies having improved their financial performance substantially over the past few years. In fact, the U.S. economy has been outperforming Europe on a broad front, as a result of which the U.S. dollar clearly strengthened against the euro. Another major shift in the market was the price of oil, which was halved during the latter half of the year. The fall in the price of oil may help the European economy, albeit with some delay.

In terms of market capitalisation, the value of the equity portfolio increased from EUR 6.5 billion at the beginning of the year to EUR 7.0 billion at the end. At the end of 2014, direct equity investments accounted for 31.2 (33.8) per cent of the total with 68.6 (66.2) per cent invested through funds. At the end of the year, VER held direct investments in 156 (160) companies and fund investments in 60 (61) funds.

Alternative investments

VER’s alternative investments yielded a good return in 2014. At the end of the year, the return was 7.8 (5.7) per cent. The highest returns were generated by private equity investments at 12 per cent. Similarly, real estate investments showed a rising trend throughout the reporting period with the overall return reaching 9.9 per cent by the end of the year. Other asset classes also performed well.

As in the previous years, the robust development of the share market was reflected on private equity investments in the form of increased valuations. With real estate investments, the positive mood of the market was sustained translating into fairly high returns. Moreover, profitable property deals both in Asia and Europe contributed to the yields. In the absolute return portfolio, the most positive contributions were produced by macro and CTA strategies that benefitted from the strong dollar, the falling price of crude and robust fixed-income markets. The Private Credit portfolio is under active construction and so returns suffered to some extent from the high initial cost relative to returns. Two new direct investments were made in the infrastructure portfolio increasing the relative weight of this asset class in the alternative investments portfolio. A parallel investment was made in Caruna’s power distribution network in the spring and a 14.6 per cent interest acquired in Fingrid Oyj in the autumn.

VER’s alternative investments consist of investments in real estate, private credit and infrastructure funds as well as absolute return funds. At the end of 2014, alternative investments accounted for 10.1 per cent of VER’s total investment portfolio with the neutral allocation being 9.0 per cent. The market value of the portfolio was EUR 1,774 (1,392) million. Open investment commitments totalled EUR 669 (516.5) million. Of the investments, 30.4 (33.4) per cent consisted of indirect real estate investments while 1.3 (1.2) per cent were made in listed real estate investments and 28.6 (35.3) per cent in absolute return funds. Private equity funds accounted for 13.7 (15.3) per cent, infrastructure funds for 18.2 (9.5) per cent and Private Credit funds for 7.8 (5.3) per cent of the total. During 2014, four direct investments were made in unlisted companies and other investments in 11 new funds. Additionally, a decision was made regarding the private equity investment mandate in respect of emerging markets.

State Pension Fund

Established in 1990, the State Pension Fund (VER) is an off-budget entity. Through VER, the state prepares for financing future pensions and seeks to equalise pension expenditure over time. VER’s target funding ratio is 25 per cent of the state’s pension liabilities. No time limit is prescribed by law for the attainment of this objective.

By nature, VER is a buffer fund. VER’s assets are not used to pay out pensions directly; instead, all state pensions are paid out of the appropriations allocated for this purpose in the government budget. Under the Act on the State Pension Fund, an amount equivalent to 40 per cent of the state’s total pension expenditure is to be contributed to the state budget annually. On 12 December 2014, Parliament passed a decision to transfer a maximum of EUR 500 million during 2015 to the budget in addition to the regular amount.

The transfer of funds to the state budget is a key factor regulating VER’s growth. The amount of transfer – 40 per cent of the state’s annual pension expenditure – is prescribed by law. In 2014, the transfers totalled EUR 1,728.2 (1,678.3) million. Year-on-year, the amount transferred grew by EUR 49.9 million due to the increase in state pension expenditure. By the end of 2014, VER had contributed a total of EUR 24.4 billion to the state budget.

At the end of 2014, the state’s pension liabilities were EUR 95.4 (94.0) billion. Pension liabilities refer to the capital value of the pension rights accrued by 31 December 2014 by those covered by the state pension scheme. Since 2013, the state’s pension liabilities have been calculated by the Local Government Pension Institution Keva. VER’s target funding ratio is 25 per cent of the state’s pension liabilities. At the end of 2014, VER’s funding ratio was 18 (17) per cent. Success in attaining the target funding ratio is determined by the return on investments, pension premium income and transfers to the government budget.

VER’s revenues consist of the insurance premiums paid by the employers and employees covered by the state pension system and the returns on investments. In 2014, VER accumulated a total of EUR 1,705.3 (1,628.0) million in pension premiums, of which EUR 776.0 (747.9) million was paid by government agencies and institutions and EUR 929.3 (880.1) million mostly by municipalities and employees. The 2014 pension premium income exceeded that of 2013 by EUR 77.3 million. Additionally, VER received unemployment insurance premium income in the amount of EUR 7.0 (5.8) million.

In 2014, VER’s operating expenditure reached a total of EUR 6.9 (7.0) million, equivalent to 0.04 (0.04) per cent of the Fund’s total assets. Of this, EUR 2.4 (2.7) million were personnel costs and EUR 4.5 (4.3) million other costs. As an organisation, VER seeks to maximise cost efficiency. In 2014, operating expenditure remained at the 2013 level.

At the end of the reporting period, the number of permanent staff was 23.


  31.12.2014 31.12.2013
Investments, MEUR (market value) 17 600 16 335
Fixed income investments 8 874 8 431
Listed equities 6 951 6 511
Alternative investments 1 774 1 392
The breakdown of the investment portfolio % (*
Fixed-income investments 50,4 % 51,6 %
Listed equities 39,5 % 39,9 %
Alternative investments 10,1 % 8,5 %
*) The impact of derivatives in the portfolio is -0,3 %
  1.1.-31.12.2014 1.1.-31.12.2013
Return on investment, % 7,8 % 6,4 %
Fixed income investments, % 4,9 % -1,6 %
Listed equities, % 11,7 % 18,2 %
Alternative investments, % 7,8 % 5,7 %
Pension contribution income, MEUR 1 712 1 634
Transfer to state budget, MEUR 1 728 1 678
Net premiums, MEUR -16 -45
Pension liability, MEUR 95 400 94 000
Funding ratio 18 % 17 %