Finns’ pensions are starting to be invested with even greater risk – “These are big things in magnitude”

Employment pension company Investment director of Ilmarinen Mikko Mursula estimates that the publicly available information on how the pension reform will change the investment of pension assets is in line with what has been expected.

In that sense, it sounds good.

He emphasizes that he has not seen the final proposal, but relies on publicly available information.

“The reform takes us towards the goal of raising the risk level of investment portfolios and thereby their return expectations in the long term,” he estimates.

acquired by HS according to the information the reform makes it possible to take a bigger equity risk with various technical means.

According to them, the so-called equity return-related portion of the return requirement will be increased from the current 20 percent to 30 percent. The maximum amount of share investments is changed to 85 percent. The safety level of the solvency limit will be lowered to 95 percent from the current approximately 97 percent.

According to Mursula, the increase in the contingent liability linked to equity returns to 30 percent and the decrease in the solvency limit to 95 percent are significant changes.

“These are big things in terms of magnitude and make it possible to increase the share weight of investment portfolios,” says Mursula.

He emphasizes that since he does not know if there are other changes planned, it is difficult to assess whether these are the most significant changes.

Lowering the safety benefit level of the solvency limit to 95 percent means that the pension company can take a bigger risk than before without having to increase its solvency as much as before. In other words, increasing risk-taking becomes easier in a way.

On the other hand, the share return-linked contingent liability buffers the fluctuation of share returns. Private occupational pension insurers jointly bear part of the risk caused by fluctuations in stock returns.

According to Mursula, the fact that the share of shares in investments will rise to a maximum of 85 percent from the current 65 percent is not quite as significant a change.

It doesn’t mean that the proportion of investments would actually be increased to such a large extent, but some upper limit for taking equity risk must be set.

It’s more about the tailboard.

The current solvency regulations do not clearly say how much of their investments a pension company can put into shares. In practice, the situation has been that when the 65 percent limit is exceeded, the company has had an additional solvency requirement.

Now, Finnish pension companies have invested slightly more than 50 percent of their investment assets in shares on average. Ilmarinen’s share of shares is approximately 50 percent, Varma’s 55 percent.

The share of shares in the investment portfolio has increased as the risk-bearing capacity of pension companies has increased and the value of the shares has increased.

HS information according to the reform gives occupational pension companies the opportunity to use so-called debt leverage also in all real estate investments of their subsidiaries. In the past, the opportunity has only concerned rental housing investment.

Mursula does not want to comment on the matter, because it is not known what else is related to it.

Basically, a lot of leverage is used in real estate investing. Debt leverage, i.e. making real estate investments with debt money, increases returns in a good case, but also increases losses in the opposite case.

On the other hand, the possibility of employee pension companies for so-called tel-back lending is limited. Companies have the right to borrow money back from the pension companies, which is accumulated in the pension funds from the pension contributions they pay. In the future, the company may borrow back a maximum of 10 million euros. It’s mostly about liquidity management.

HS:n based on the background discussions held, the occupational pension sector is satisfied with how the pension reform will improve their opportunity to increase risk-taking and thus improve investment returns.

Most industry players did not want to publicly comment on the pension reform yet, because they have not yet received the proposal to study.

However, the reform was judged to be manageable and implementable.

In addition to the investment reform, a key reform will be the so-called automatic stabilizer, which has been more challenging to agree on than the investment reform.

Starting in 2030, a new cutter called the “inflation stabilizer” will be introduced to the annual index increases of pensions. In practice, the cutter reduces pension increases if the general price level increases more strongly than wages.

The occupational pension organizations reached an agreement on the reform on Sunday evening. They have not yet announced the content of the reform to the public.

The administrations of the labor market organizations will discuss the outcome of the negotiations this week, after which it will be handed over to the government, when the government can start promoting the changes to the legislation proposed by the organizations.