International Comparison of Regulation of Pension Asset Investments

The weak economic outlook of the Finnish economy and the large domestic portfolio weighed down the returns of Finnish earnings-related pension investments in the OECD comparison of the top six countries.

In the comparison of pension funds of six OECD countries, the real return of pension asset investments have amounted to anything between 4.8 and 10.2 per cent in the previous five years (2009-2013). In Finland, the average real return of the entire earnings-related pension field amounted to 6.2 per cent in the review period. The annual investment return of private-sector pension insurers was 5.6 per cent and that of public-sector pension insurers 7.3 per cent.

In the report by the Finnish Centre for Pensions and The Finnish Pension Alliance TELA, An International Comparison of the Regulation of Pension Asset Investments, the pension funds of Finland, the Netherlands, Sweden, Denmark, Norway and Great-Britain are examined. The comparison includes the major pension funds of these six countries in which pensions are largely funded. The return of these funds has been significantly higher than the average pension investment returns of the OECD countries (3.1 per cent per year) in nearly the same time period (2009-2012).

The average returns of the Finnish private and public sector earnings-related pension providers are reviewed separately since the private-sector pension providers’ investments are limited by the solvency regulations.

The investment returns of the Finnish private-sector earnings-related pension providers are considerably affected by a strong weighting on domestic investments (nearly 40%).

“A domestic weighting in investments works well when the domestic economy performs well. However, in the last few years, Finnish GDP has been in the red. The expected outlook has also been weak,” explains Maria Rissanen, Analyst at TELA.

In Sweden, the weighting of domestic investments has also been extensive (50-60%), yet the real return of pension assets have remained high there. This is explained by the economic growth in Sweden, which has been clearly stronger than in the other countries under review.

The lower share of domestic investments in the investment portfolio of the public-sector pension providers (approx. 20%) partly explains the difference in return between public- and private-sector pension investments.

“The gap in return grew in particular between the years 2009-2013, when the Finnish GDP shrank by approximately one per cent per year,” says Rissanen.

Precautionary Principle Steers Investments

The regulatory principles for pension investments have become more unified in Europe in the 21st century. Pension assets are now invested in line with the so-called precautionary principle. Investments are now steered and monitored based on risk rather than on quantitative limitations set for investment operations.

Despite the trend to standardise, we cannot draw direct conclusions of the impact of regulations alone on the pension providers’ investment returns.

“The structural differences between the pension systems (for example, defined contribution or defined benefit systems) explain the practical investment operations and the investment allocations more than regulations do,” explains Mika Vidlund, Liaison Manager at the Finnish Centre for Pensions.

Further information

Maria Rissanen, Analyst, The Finnish Pension Alliance TELA, tel.  +358 10 680 6745, maria.rissanen(at)tela.fi

Mika Vidlund, Liaison Manager, Finnish Centre for Pensions, tel. +358 50 377 8140, mika.vidlund(at)etk.fi

Antti Mielonen, Special Adviser, Finnish Centre for Pensions, tel. +358 29 411 2472, antti.mielonen(at)etk.fi

Ilkka Geitlin, Attorney, The Finnish Pension Alliance TELA, tel. +358 10 680 6730, ilkka.geitlin(at)tela.fi