Public-sector Earnings-related Pension Investments
The pension assets of the employees of bodies governed by public law are handled by five pension providers: Keva, the State Pension Fund, the Central Church Fund, the pension fund for the employees of Kela, and the pension provider of the Bank of Finland. At year-end 2016, the total public-sector investments assets amounted to approximately EUR 71 billion.
At year-end 2016, Keva had EUR 49 billion in investment assets and the State Pension Fund EUR 19 billion. Keva is the largest and the State Pension Fund the fifth largest investor of earnings-related pension assets. In the local government pension scheme, funding was started in 1988, and in the state employees’ pension scheme, in 1990. Up to the year 2000, the assets of the State Pension Fund were invested only in government bonds.
Of the public-sector earnings-related pension assets, approximately 50 per cent were invested in shares and share-like instruments. The proportion of foreign investments totalled approximately 80 per cent of all investments. The proportion of investments in shares and foreign investments were higher than in the private sector.
The higher proportion of investments in shares and foreign investments in the public sector is explained by the difference in funding mode. The public-sector pension providers function without competition in their own sector. By nature, the assets are pure buffer funds in terms of the increase in the ratio of pension expenditure to the wage sum.
For instance, Keva strives to keep the pension contribution stable through accumulated assets. The accumulating and dissolving of assets is determined with this objective in mind. The State Pension Fund, on the other hand, aims for a long-term funding rate of 25 per cent. As for the earnings-related pension expenditure under the State Employees’ Pensions Act, 40 per cent of the expenditure is financed annually from the State Pension Fund.
In the public sector, the amount of the employee’s accrued pension rights has been determined but not the share funded from it . Thus, the pension liability to be covered has not been determined. The investment operations are based on the target allocation of investment objects as decided by the administrative bodies. Limited deviations can be made on the basis of, for instance, the development in the view on interest rates or share prices.
Keva used to set a long-term target for the real rate of return (4 per cent per year), but at the moment, there is no fixed target for the return. Investments are used to provide as strong support as possible for stabilised contributions. The State Pension Fund sets its targets annually.
Return on investments
Public-sector investment returns have varied more than the private-sector returns. In years of falling share prices, returns have been lower, and in years of rising prices, higher than in the private sector. The larger variation is due to the larger proportion of investments in shares of public-sector assets. However, there are no differences in the average return for the period under review.