Press release, 29.2.2012

Press release, 29.02.2012

-2.3 per cent return on investment for the State Pension Fund

The return of the investments of the State Pension Fund (VER) was -2.3 per cent in 2011 (11.7 per cent in 2010). The market value of the fund’s investments was 13.7 billion euros at the end of the year (13.9 billion euros in 2010). VER investments comprised 56.6 (54.3) per cent in fixed income investments, 36.4 (40.4) per cent in equities, and 6.9 (5.2) per cent in other investments.

The year 2011 was marked by the Eurozone state debt crisis. The return of the State Pension Fund's fixed income investments was 4.1 per cent, which is a good result in these circumstances. Despite this, total investment return was negative due to a declining economic outlook and lower returns on equity caused by the European debt crisis. Equity investments suffered the most from the turbulent markets and their return was negative. Other investments got through 2011 quite well despite the turbulent financial markets.

The return for the year 2011 was relatively good in light of the European financial markets suffering from the government bond crisis. We are very pleased with the 4.1 per cent return from our fixed income investments. Even though the problems in Europe are yet to be resolved, there has been an air of relief in the financial market at the beginning of year. Fixed income and equity investments have given good returns in January and February, says Managing Director Timo Löyttyniemi.

VER’s return exceeded its long-term return objective, because its ten-year (2002-2011) average annual return of 4.8 per cent exceeds the effective cost of the government debt. The effective average costs of government debt over the same period were 3.7 per cent.

VER’s inflation-adjusted realised return for ten years (2002 to 2011) was 3.1 per cent.

For further details, please contact:

Managing Director Timo Löyttyniemi, tel. +358 9 2515 7010, mobile +358 50 336 2094

www.ver.fi

VER publishes a printed annual report at the beginning of April.

Year 2011 in Brief

Fixed income investments

The return on fixed income investments was 4.1 per cent, while the corresponding figure for 2010 was 3.9 per cent.

2011 was a good year for VER’s fixed income investment operations. Calculated according to market value, the fixed income portfolio grew from 7.6 billion euros at the beginning of the year to 7.8 billion euros at the end. Government bonds of financially stable European countries and corporate bonds of companies with secure balance sheet structures yielded the highest returns over the year.

The allocations of the fixed income portfolio were adjusted during the beginning of the period so that the money market share was increased to overweight and, in turn, government bonds were decreased to underweight. The allocations were modified to a more neutral direction at the beginning of June. At the same time, the share of the most risky government bonds was decreased further. The emerging market dept portfolio was at a neutral weight at the end of the year. Allocation of the credit portfolio was kept slightly overweight, even though some investments matured.

VER primarily focuses its own direct investments on government debts, corporate bonds with a credit rating of Investment Grade, and money market investments. Other investments are made in funds. Direct fixed income investments comprised 80.0 per cent (84.6) of the fixed income portfolio at the end of the year. At the end of the year, there were direct fixed income investments in 269 (256) obligations and fund units in 25 (23) funds.

Listed equity investments

The return on equity investments was -12.3 per cent, while the corresponding figure for 2010 was 23.6 per cent.

The year 2011 was weak for VER’s equity investment as the portfolio return was clearly negative. Returns from Finnish investments were especially weak for the year. Of VER’s equity portfolios, only North America yielded a positive return. During the year, large companies yielded better returns than small companies. Equity allocation was successful in 2011. The equities share was reduced at the beginning of the year, and during the strong decrease in the equities market in August and September the share of equities was increased, in turn. The net buys of equities amounted to 63 million euros for the year 2011. The equity weighting was at 36.4 per cent by the end of the year.

The year 2011 was exceptionally nervous in the financial market. The unresolved situation in Greece bothered the market for the entire first half of the year, and in the summer the crisis started to expand into other indebted countries as well. These things, together with the uncertainties connected to the raising of the United States’ debt limit, resulted in a very strong decrease in the equities market at the end of the summer. Equity prices continued to decline until the end of September apart from some minor phases of increase. In October, the equities market trend started to turn slowly and some markets, such as North America, even reached a positive return at the end of the year.

The market value of the equity portfolio declined from 5.6 billion euros to 5.0 billion euros during the year under review. At the end of the year, 32.7 (35.7) per cent of VER’s equity portfolio was managed as direct investments, and 67.3 (64.3) per cent was invested through funds. At that time, VER had direct equity investments in 149 (160) companies and holdings in 60 (60) funds.

Other investments

Return on other investments was 6.1 per cent, while the corresponding figure for 2010 was 8.6 per cent.

Other investments got through 2011 quite well, even though there was a great deal of uncertainty in the financial market throughout the year. With the exception of absolute return funds, the returns on other investment types were clearly positive for the entire year.

Private equity investments yielded the best return due to good exits and companies’ continually significantly high valuation levels. The real estate funds’ running cash flow and especially the value increase of real estate at the end of the year turned the negative real estate returns from the beginning of the year into clearly positive by the end of the year. Despite the difficult situation in the markets, absolute return funds were only slightly negative and the portfolio’s relative return was good in comparison with the absolute return indices.

Other investments at VER are comprised of real estate funds, private equity and infrastructure funds, and absolute return funds. At the end of 2011, the share of other investments in the VER portfolio increased from 5.2 per cent at the end of the previous year to 6.9 per cent, with a 7.0 per cent neutral allocation. The market value of the portfolio was 948.3 million euros (731.4). The value of uncalled commitments was 339.7 million euros (315.9). Of total invested assets, indirect real estate investments accounted for 42.8 (37.5) per cent and listed real estate investments for 1.2 (1.8) per cent. Private equity investments accounted for 22.8 (26.9) per cent, infrastructure funds for 12.0 (12.0) per cent, and absolute return funds for 21.3 (21.9) per cent of the invested assets.

Other investments yielded a total return of 6.1 (8.6) per cent. Private equity investments returned 11.7 (17.8) per cent, infrastructure investments 8.8 (9.4) per cent, real-estate investments 5.8 (6.2) per cent, and absolute return funds -0.6 (6.1) per cent.

The State Pension Fund (VER)

The State Pension Fund was established in 1990 as a fund external to the State budget. Through VER, the State sets aside financing for future pensions and seeks to balance its pension expenses year by year. The function of VER is long-term management of the assets that are entrusted to it with a view to ensuring the security, returns, and liquidity of investments and their appropriate diversity and diversification. Established in 1990, VER is a fund outside the State budget, whose proceeds the State uses to prepare for the financing of future pension liabilities and the balancing of pension costs. VER is an investment organisation, whose tasks include managing assets entrusted to it over the long term and ensuring that investments are secure, deliver a high return and can be converted into cash, while being appropriately diversified.

VER has the character of a fiscal buffer: the State funds assets in VER and, through investment returns and/or liquidation of these funds, the State can also balance the annual liabilities of future pensions. The assets of VER are not used directly for paying pensions. Instead, all pensions in the State pension scheme are paid through State budget allocations.

The State pension liability at the end of the year was 92.5 billion euros (90.6). The pension liability refers to the capital value of pensions accrued by 31 December 2011, covered by the State pension scheme. The assigned funding goal for VER is 25 per cent of the pension liability. The degree of funding at the end of 2011 was 15 (15) per cent. Reaching VER’s funding target is affected by investment income, pension contribution income, and transfers to the state budget.

Under the State Pensions Act (Valtion eläkelaki, no. 1295 of 2006), a sum corresponding to 40 per cent of the State’s annual pension liabilities may be transferred from the fund to the budget. Transfers from the fund to the State budget have been a key factor in regulating the size of the fund. In 2011, a total of 1,509.4 (1,472.7) millioneuros were allocated to the State budget. The budget transfer increased by 36.7 million euros from the previous year. The increase was due to the increased State pension expenditure. By the end of 2011, a total of 20.1 billion euros in VER assets had been transferred to the state budget.

VER’s income in 2011 consisted of employer and employee pension contributions within the State pension scheme, income from interest, and investment income.

Pension contributions amounted to 1,609.1 (1,621.6) million euros, of which 738.5 (743.8) million euros came from government agencies and 870.6 (877.8) million euros from other pension contribution returns, mainly from local authorities and employees. Pension contribution income was 12.5 million euros lower than in 2010. Additionally, VER received 4.7 (5.4) million euros in disability insurance contribution.

The total operating costs of VER amounted to 6.2 (6.4) million euros, which is 0.05 (0.05) per cent of the assets.

VER employed a permanent staff of twenty at the end of 2011.