FINLAND - The market risk in equity investment would in the future be borne by Finland's pension system as a whole, under a new proposal for a buffer system put forward by the Permanent Negotiating Group of the Finnish social partners.
The buffer is aimed at allowing pension insurance companies to increase their investment in riskier assets, such as listed equity, without eroding their solvency capital.
Jaako Tuomikoski, deputy chief executive at the e20bn Ilmarinen Mutual Pension Insurance Company, explained: “This is done by creating a new buffer, the size of which does not depend on the investment experience of the insurer, but instead the change in this buffer will be identical in each and every pension institution and determined by the average yield of the quoted shares included in the portfolios of the pension insurers.”
The new buffer would be included in the liabilities of the insurer, to ensure “proper treatment” with regard to taxation, he added.
Unlike pension funds and insurance companies in the second pillar, which have had to reassess their asset allocation as a result of the EU directive, Finnish pension insurance companies, which are exempt from the directive as they form part of the first pillar, are looking to increase their equity exposure by 10-15% over the medium term.
Under current solvency laws in Finland, the amount private schemes can invest in different asset classes is dependent on their solvency ratio. The higher the solvency of the fund, the more leeway given to invest in areas considered as “high risk”.
Matti Leppälä (pictured), director, international and legal affairs, The Finnish Pension Alliance (TELA), said the idea behind the new buffer system was that pension insurance companies would not be forced to sell shares as rapidly as is required today, if the equity markets decline.
“Under the current solvency capital requirements, if you have high exposure to equities and the value of equity goes down, it eats up your solvency very rapidly and you have to sell the assets and invest in [assets] considered less risky to push your solvency back up again,” he said.
“In the proposal, the pension system as a whole will be able to take more risk, but it will not be each and every individual pension institutions’ risk, it will be a risk shared by all institutions.”
Tuomikoski said the normal solvency buffers, reflecting investment experience on the individual insurer level, would probably be slightly enlarged as part of the proposal. However, he added that the details are still under consideration and “collaboration” is necessary to make the new system function as intended.
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