VER’s 1 January–30 June 2017 return 3.7%; five-year annual return 7.2%

Published 2017-08-22 at 13:40

Investment environment

The investment markets continued to develop fairly favourably in early 2017. The real economy improved more than expected, particularly in the euro area. Importantly to the investment markets, the inflation rate and expectations remained low, with most central banks continuing to pursue light monetary policies. Not even the continuation of the series of relatively moderate increases in the federal funds rate carried out by the United States Federal Reserve caused any major jitters in the market.

The positive trend of the first six months of the year was most clearly evident in emerging market interest rates and corporate bonds. While the development in the second quarter was more modest, the overall market levels were sustained.

VER’s returns on investments

As of the beginning of 2017, 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 30 June 2017, VER’s investment assets totalled EUR 19.2 billion.  In the first half of the year, the return on investments at fair values was 3.7 per cent. The average nominal rate of return over the past five years (1 April 2012–30 June 2017) was 7.2 per cent and the annual ten-year return 4.5 per cent.

The real rate of return during the first six months of the year was 3.6 per cent. VER’s five-year average real return was 6.4 per cent and 10-year real return 3.0 per cent.

From the state’s point of view, it is pertinent to compare the return on investments with the 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 2.4 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 determined for an amount equivalent to the size of the Fund by over EUR 5.3 billion.

VER monitors long-term return relative to overall market development by comparing the actual return with a global index in which the weight of both equities and currency-hedged bonds is 50 per cent.


A closer look at January–June 2017

In accordance with the directive of the Ministry of Finance, VER’s investments are divided into fixed income instruments, equities and other investments. At the end of June, fixed income instruments account for 43.7 per cent, equities 44.0 per cent and other investments 9.5 per cent. Of the large asset classes, liquid fixed income instruments generated a return of 1.2 per cent and listed equities 6.9 per cent during the first half of the year.


Liquid fixed income investments

The return on liquid fixed income instruments was 1.2 per cent.

During the first six months of the year, 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 were dispelled, there were speculations about the termination of ECB’s asset purchase programme despite the moderate inflation prospects. 

In the United States, interest markets were relatively calm despite rate increases by the FED in March and June. The FED has announced that it will start unwinding its balance sheet and continue rate increases. The markets respond to the rate increases by the FED less strongly than indicated by the central bank.

During early 2017, 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 4.1 per cent return.

The market conditions for private credit funds remained favourable. Demand for corporate funding was strong, even though there are signs of shrinking interest margins.


Listed equities

The return on listed equities was 6.9 per cent.

On the whole, the mood in the global equities market was positive during the first half of 2017. The figures posted by listed companies were largely on the rise relative to 2016, and future prospects were felt to be quite bright. While the world continues to be beset by uncertainties, especially geopolitical ones, even to an exceptional degree, they have not yet had a negative impact on the sentiment on the equities market. With low interest rates, equities have proved an attractive investment. The best return in the first half of the year was yielded by Nordic shares, whereas North American stocks generated the lowest returns as a result of the falling dollar.


Other equity investments

VER’s other equity investments include investments in private equity funds and non-listed equities.

Private equity investments returned 7.1 per cent and unlisted equities 7.4 per cent.

The relatively strong performance by private equity investments in early 2017 reflected the overall upward development of the market. Successful exits from portfolio funds also contributed to the positive financial performance.


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

The return on real estate funds was 0.4 per cent while infrastructure investments yielded 6.6 per cent.

No major changes have taken place in the European real estate market and, even though the early-year return has been modest, the expectations for the second half of the year are positive. Returns on the infrastructure investments have remained sound. Underlying the healthy performance were dividends received from the investments and successful exits.   

Hedge funds yielded a return of 1.7 per cent in the first half of the year. The period was challenging particularly for macro and CTA funds in the absence of distinct market trends. The best return was generated by equity strategies and event funds specialising in corporate restructuring.

Risk premium strategies returned -0.8 per cent (TWR). The early part of the year was especially tough for momentum and value strategies, which suffered in June from market reactions to the message from central banks which was more hawkish than expected.

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. The state’s pension cost totalled EUR 4,476 million in 2016 while the 2017 budget foresees an expenditure of EUR 4,568 million. As VER contributes 40 per cent towards these expenses to the government budget, the transfer to the budget in the first half of the year amounted to EUR 914 million. Over the same period, VER earned a total of EUR 719 million in pension contributions. 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 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)

19 241

18 767

Fixed income investments

8 403

8 640

Equity investments

8 462

8 445

Other investments

1 821

1 579


Breakdown of the investment portfolio

Fixed income investments

43,7 %

46,0 %

Equity investments

44,0 %

45,0 %

Other investments

9,5 %

8,4 %

Impact of derivatives

2,9 %

0,5 %


1.1. 30.6.2017

1.1. 31.12.2016

Return on investment

3,7 %

6,7 %

Fixed income investments

Liquid fixed income investments

1,2 %

4,0 %

Other fixed income investments

4,1 %

2,4 %

Equity investments

Listed equity investments

6,9 %

9,7 %

Private Equity investments

7,1 %

9,0 %

Other investments

Real Estate funds

0,4 %

11,9 %

Infrastructure funds

6,6 %

13,8 %

Hedge funds

1,7 %

1,0 %


Pension contribution income, MEUR


1 498

Transfer to state budget, MEUR


1 790

Net contribution income, MEUR



Pension liability, MEUR


93 000

Funding ratio


20 %


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 June 2017.

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