Earnings-related pension assets grew by EUR 13 billion in 2023: pension reform should increase share weighting moderately

Earnings-related pension assets experienced reasonable growth in 2023.

“Investments performed better because of the strong stock markets last year. Fixed-income investments also provided reasonably good yields after a long dry spell,” says Kimmo Koivurinne, an analyst at TELA.

The nominal yield on earnings-related pension assets in 2023 was 6.3 per cent. The real yield, adjusted to remove the effects of inflation on total return, was 2.6 per cent. In real terms, equity investments had yielded 5.0 per cent by the end of the year, fixed-income investments 3.9 per cent and alternative investments 0.9 per cent, while property investments’ real yield was -10.3 per cent. Over ten years, the total return on earnings-related pension assets in real terms has been 3.5 per cent annually. These data are found in TELA’s fresh statistics.

There were few if any changes to the breakdown in assets by class or geographical region during Q4.

Moderate increase share risk would be sensible

This year will see negotiations on Finland’s next pension reform. Labour market organizations will need to thrash out a reform that will consolidate public finances and include a rule-based stabilizing system. The goal set for the reform is to strengthen the public finances over the long term to the tune of 0.4 percentage points of GDP. Private-sector earnings-related pensions are underfunded, primarily because of falling birth rates.

“A reform aimed at improving earnings-related pension assets’ investment yields can close some of that shortfall, but not all of it,” Koivurinne says.

The earnings-related pension sector has considered means to increase returns on its investments. In practice, this would mean increased equity risk: investing even more in shares. The earnings-related pension providers who are members of TELA support a moderate increase of shares in the portfolio.

“Shares have provided good returns, but their weighting should only be increased moderately, as a change in the interest-rate environment, in particular, means that other asset classes also give reasonable returns. Drastically increasing the proportion of shares would also significantly lower the benefits associated with investment diversification,” Koivurinne says.

Q4 of 2024 also saw fixed-income investments return exceptionally strong yields. The good quarter meant that the nominal annual yield on all fixed-income investments was 7.6 per cent. Between 2010 and 2019, their average annual nominal yield was 3.1 per cent.

A new investment strategy with increased equity risk would affect private-sector earnings-related pension providers. It would mean amending the legislation and bases for calculation that limit their risk taking. Private-sector earnings-related pension providers’ solvency is regulated more stringently than public-sector pension provider KEVA, for example. It announced in the autumn it was raising the risk level in its portfolio.

At present, around 50 per cent of private-sector pension funds are in shares and share-like investments. A moderate increase in this proportion would be an endeavour to reach just under 60 per cent.

“Funding earnings-related pensions using investment yields is a very long-term endeavour. The pension assets have to be able to withstand strong turbulence. The fruits of the investment reform can’t be picked straight away. The goal of the pension reform must be to lighten the burden of the small age cohorts being born now,” Koivurinne says.

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TELA’s statistical analysis of pension assets consists of data on the investments of pension providers, pension funds, pension foundations, the Pension Fund for the Employees of KELA, KEVA, the Church Pension Fund, the Farmers’ Social Insurance Institution (MELA), the Seafarers’ Pension Fund, the Bank of Finland’s Pension Fund, and the State Pension Fund of Finland. Only statutory pension coverage is included in the statistics. The earnings-related pension assets, for which TELA gathers statistics, do not contain other receivables and debts or tangible assets recognized in the balance sheet.

The pension assets for which TELA gathers statistics refer to investable assets. More detailed information on the amount and allocation of investment assets is available in full on the Amount of pension assets page of the TELA website.

You can also consult the statistics in the statistical database.

TELA will publish its next investment analysis, of Q1 2024, at the end of May.