VER’s 1 January–30 September 2017 return 5.2%; five-year annual return 6.6%

Published 2017-10-25 at 12:16

Investment environment

During the first three quarters of 2017, the investment environment was largely favourable.  In macroeconomic terms, the economy continued to grow across the globe in all sectors. This has boosted the financial performance of the corporate sector. At the same time, the  easy monetary policies pursued by central banks continued to sustain the upward movement in stock prices.

Corporate bonds and emerging markets – both perceived as riskier investments in the fixed-income markets – are still yielding a better return than sovereign bonds and money market investments.

The State Pension Fund’s portfolio also continues to perform well.

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 September 2017, VER’s investment assets totalled EUR 19.4 billion.  During the first three quarters, the return on investments at fair values was 5.2 per cent. The average nominal rate of return over the past five years (1 October 2012–30 September 2017) was 6.6 per cent and the annual ten-year return 4.7 per cent.


The real rate of return during the first three quarters was 4.9 per cent. VER’s five-year average real return was 6.0 per cent and ten-year real return 3.2 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 compared to paying back 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 cumulative average cost of equivalent government debt by about EUR 5.6 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–September 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 September, fixed income instruments accounted for 42.5 per cent, equities 46.3 per cent and other investments 9.4 per cent of the total. Of the large asset classes, liquid fixed-income instruments generated a return of 1.9 per cent and listed equities 9.2 per cent during the first three quarters of the year.





Liquid fixed-income investments

The return on liquid fixed income was 1.9 per cent.

Early in 2017, 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 abated, there were speculations about the termination of the ECB’s asset purchase programme despite the moderate inflation prospects. More will be known about interest rates after the ECB’s policy meeting in October.

In the United States, interest markets have remained relatively calm despite rate increases by the Federal Reserve (FED) in March and June. The FED has announced that it will start unwinding its balance sheet in October and that further rate increases are to be expected before the year is out. The markets respond to the rate increases by the FED less strongly than indicated by the central bank governors in view of 2018 and 2019.

Ample liquidity, central banks’ asset purchase programmes, low returns on emerging market sovereign debt, improving economic growth and moderate inflation have underpinned the corporate bond and emerging markets. Their interest and spread levels have fallen extremely low, which is mirrored in the excellent return on emerging market investments and non-investment grade corporate bonds during the first three quarters.



Other fixed-income investments

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

Private credit investments yielded a 5.8 per cent return.

Illiquid fixed-income markets have witnessed a slight decline in margins during the current year. However, the risk profile of funds has been raised, particularly by funds investing in large companies without covenants or using very weak covenants. Most of the funds in VER’s portfolio invest in SMEs and, as a result, the portfolio funds have continued to develop favourably across the board even after the summer.



Listed equities

The return on listed equities was 9.2 per cent.

During the first three quarters of 2017, the world stock market has thrived. While some fluctuations have been detectable, the mood has remained largely positive with the risk sentiment favouring stocks. Listed companies have continued to post growth figures, and a range of indicators suggest that the prospects for the rest of the year are fairly bright. Interest rates continue to remain low, which has contributed to stock prices. Geopolitically, there are still major risks; for example, if a war broke out in the Korean Peninsula, the situation would be reversed overnight. However, the financial markets continue to consider such an outcome highly unlikely, which is reflected in prices. Of VER’s portfolio investments, the best returns were generated by the Nordic countries and the emerging markets and the lowest returns by investments in US stocks.



Other equity investments

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

Private equity investments returned 11.9 per cent and unlisted equities 8.3 per cent.

The positive trend in private equity investments continued in the third quarter of 2007, partly driven by sustained favourable developments in the stock markets. The improved valuations of portfolio companies have also been reflected in successful exits.  



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

The return on real estate funds was 2.2 per cent while infrastructure investments yielded 8.3 per cent.

No major changes have taken place in the European real estate markets since the summer. The returns on the funds are expected to develop favourably during the rest of the year. For VER’s infrastructure investments, the year was good due to healthy dividends and successful exits.

Hedge funds yielded a return of 3.5 per cent during the reporting period. In macro funds, the first three quarters saw great divergence in terms of returns (best and worst return in the portfolio during the period).  Event funds specialising in corporate restructuring and market-neutral equity strategies gave a sound return.

The return on risk premiums was -1.4 per cent. So far by the end of September 2017, the year has been particularly challenging for carry and value strategies, with currency side carry models performing especially poorly. With equities, multi-factor models generated a healthy return.


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 transfers to the 2016 budget by the end of September 2017 amounted to approximately EUR 1,371 million. Over the same period, VER earned an estimated EUR 1,077 million in pension contributions. Its net contribution income has now turned permanently negative, meaning that substantially more money is transferred by VER to the government budget than VER receives in pension contribution income. This gap 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 roughly remainsat 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)

19 447

18 767

Fixed-income investments

8 268

8 640

Equity investments

9 005

8 445

Other investments

1 829

1 579


Breakdown of the investment portfolio

Fixed-income investments

42,5 %

46,0 %

Equity investments

46,3 %

45,0 %

Other investments

9,4 %

8,4 %

Impact of derivatives

1,8 %

0,5 %




Return on investment

5,2 %

6,7 %

Fixed-income investments

Liquid fixed-income investments

1,9 %

4,0 %

Other fixed-income investments

5,8 %

2,4 %

Equity investments

Listed equity investments

9,2 %

9,7 %

Private Equity investments

11,9 %

9,0 %

Other investments

Real Estate funds

2,2 %

11,9 %

Infrastructure funds

8,3 %

13,8 %

Hedge funds

3,5 %

1,0 %


Pension contribution income, MEUR

1 077

1 498

Transfer to state budget, MEUR

1 371

1 790

Net contribution income, MEUR



Pension liability, BEUR



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 19.4 billion at the end of September 2017.

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