In June 2016, the Board of Directors of the State Pension Fund (VER) adopted a strategy that provides a more detailed description of VER’s objectives and outlines the policies designed to achieve them.

VER exists for the purpose of ensuring that the state pension system is duly prepared for financing future state pensions and equalising fluctuations in state pension expenditure. VER is a buffer fund designed to equalise the imbalance between revenues and expenditure over time and its operations are based on specific long-term objectives.

VER’s target funding ratio, as defined in the State Pension Fund Act, is 25 per cent of the state’s pension liabilities. The year by which the target of the 25 per cent funding ratio is to be achieved is not specified by law or in the guidelines issued by the Ministry of Finance. However, the efforts to pinpoint the target year should be based on VER’s mission, which is to prepare for the future pension expenditure to be incurred by the state and to equalise the burden it imposes on public finances.

The state’s pension expenditure is expected to exceed EUR 6 billion by 2033. In the Ministry of Finance’s baseline scenario, relative age-related public expenditure will peak just before the mid-2030s and the long-term budget deficit will settle at over 3 per cent of GDP as of 2034. It is advisable to try to increase the Fund to its target size before the cost pressures due to retirement and demography become excessively high.

The ability to meet the objective by a realistic target year is greatly affected by the current funding ratio (19% in 2015), VER’s predicted net premium income and the expected return on investments. With due regard to all these considerations, VER has established the objective of achieving the 25 per cent funding ratio by the end of 2033.

Using the target year and estimates of pension liabilities and net premium income as yardsticks, it is possible to determine the actual rate of return that the attainment of the objective calls for. The return-to-risk ratio and basic allocation of the investment portfolio will be determined based on the target return so derived as well as the long-term objective specifically established by the Ministry of Finance for a rate of return that exceeds the cost of government debt. The basic allocation of the portfolio is determined by selecting the prospective investments from among the options that meet the specified requirements in terms of the return-to-risk ratio and expected risks following an overall assessment which is also affected by practical considerations. This approach will be applied for the first time in the preparation of the 2017 investment plan.

The required real rate of return may be affected by changes in the then-current funding ratio or the forecasts concerning premium income or pension expenditure. The expected returns on individual investments also vary. Linking the allocation of the investment portfolio to the long-term expected return means that when the required rate of return increases, the risk level is raised and vice versa. However, this policy cannot be pursued in perpetuity; instead, the target year by which the target funding ratio is to be achieved can be revised.

If necessary, the real return can be assessed every autumn when VER’s investment plan for the following year is prepared. At the time when the strategy was adopted, real return was estimated at around three per cent – with due allowance for inflation expectations.

The investment portfolio to achieve the objectives will be put together within the framework of the requirements imposed by law and the directive issued by the Ministry of Finance. Under the law, VER is required to ensure that the investments are secure, profitable, easily convertible into cash and sufficiently diversified. Additionally, the investment activities are required to ensure that the amount of money to be contributed to the state budget is not risked under any circumstances. The Ministry of Finance has also imposed restrictions on VER regarding the allocation of investments and a number of other operations. One such condition is that all real estate investments must be made by way of fund investments or other indirect investments.

In selecting and monitoring its investments, VER also complies with the requirements concerning the environment, corporate social responsibility and good governance. The principles governing VER’s investment activities in terms of corporate social responsibility are determined by the Board of Directors.

Management of market and operational risks and cost-efficiency play a key role in all operations.