VER Press Release 5.3.2014

Press release, 5 March 2014

The State Pension Fund (VER) balances the State pension costs

The market value of the investments of the State Pension Fund (VER) was 16.3 billion euros at the end of the year (15.4 billion euros in 2012). The transfer of VER funds to the State budget exceeded the income from the pension contributions received by the fund. Over the coming years, the fund will balance the pressure of the increasing State pension costs. The return on VER's investments in 2013 was 6.4 percent (11.3 percent in 2012).

The operating environment for pension investments fluctuated during 2013. The strong rise of the equity market was the most important factor contributing the profit. The year was especially challenging for fixed-income investments. The interest rates have been at a low level, due to the expansionary monetary policy of the central banks after the financial crisis, which has presented clear challenges for fixed-income investments.

VER's ten-year average annual return (2004–2013) was 5.7 percent, while the effective average cost of the government debt over the same period of time was 3.2 percent on average. The real ten-year return was 3.7 percent. VER's five-year average nominal return was 8.5 percent.

The amount of funds transferred by VER to the State was greater than the pension contributions that the fund received from employers and employees. This means that VER's net cash flow became negative. Over the coming years, the fund will balance the State pension costs.

VER's pension contribution income, which consisted of pension contributions by employers and employees, was 1,634 (1,639) million euros in total. After the transfer of 1,678 (1,604) million euros to the State budget has been deducted, VER's net contribution income will remain -45 (35) million euros.

The ageing population will continue to increase the State pension costs in the coming years. The State pension costs will increase from the current 4.2 billion euros to over five billion euros by 2020. During the same period, the transfers from the fund to the State budget will increase significantly. The negative net contribution income of the fund is estimated to peak in 2030–2035. The State pension costs, compared to the total payroll, are estimated to be at their greatest around 2030.

The State pension liability at the end of 2013 was 94.0 (92.6) billion euros. The pension liability refers to the capital value of those pension rights that have been accrued by 31 December 2013, within the State pension security. Since the beginning of 2013, Keva has carried out the calculations on the State pension liability. VER's funding goal is 25 percent of the pension liability. At the end of 2013, the funding rate was 17 (17) percent.

VER has moved into the role of balancing pension costs. The amount of funds transferred from VER to the State exceeded the pension contribution income received by the fund, which resulted in a negative contribution income for VER last year. The same development is assumed to continue. Over the coming years, VER will increasingly balance the pressure of the rising State pension costs. Our return on investment in the short and long term has remained at a good level, and thereby we have been able to create added value for the State with the investments, says Managing Director Timo Löyttyniemi.

For further details, please contact:

Timo Löyttyniemi, Managing Director of VER, tel. +358 (09) 2515 7010, mobile +358 (0) 50 336 2094

www.ver.fi

VER's annual report will be published in print in early April.

The year 2013 in brief

Fixed-income investments

The return on fixed-income investments was -1.6 percent, while in 2012, it was 8.8 percent.

For 2013, the return on the fixed-income portfolio was negative. The return on the portfolio was -1.6 (8.8) percent and the market value of the fixed-income portfolio remained at 8.4 billion euros, staying equal to its size at the beginning of the year. The duration of the fixed-income portfolio remained shorter than the neutral duration of the portfolio for the entire year.

High Yield and Investment Grade bonds generated the highest returns over the year. The allocations within the fixed income portfolio were adjusted in moderation during the period under review to maintain the risk level the same as in the beginning of the year. The money market and government bond portfolios were kept overweight, while the emerging market and corporate bond portfolios were underweighted.

VER invests directly primarily in government bonds, corporate bonds with Investment Grade credit rating, and money markets, while investing in other fixed income assets through funds. Direct investments comprised, approximately, 71.0 percent (74.0) of the fixed income portfolio at the end of the year. At the end of the year, VER was invested directly in 205 (279) obligations and fund units in 31 (27) funds.

Listed equity investments

The return on equity investments was 18.2 percent, while in 2012, it was 16.8 percent.

The return on VER’s portfolio of listed shares and fund units was good in 2013; the return was 18.2 (16.8) percent. The highest returns came from investments in developed countries; of these, Finnish shares had the best returns at over 30 percent. The year was poor for emerging markets, and these returns remained mainly negative for the year. VER’s net selling of equities amounted to a total of 434 million euros during the year, and during the last quarter of the year in particular, VER was a big net seller, as equities had performed so well during the year. At the end of the year, the share of equities in the investment portfolio was 39.9 procent.

2013 became a good year for equity investors, even though there were once again significant fluctuations in the stock market during the year. The year began very strongly, but during mid-May, the market was upset by comments from the US Federal Reserve, which stated that the economic stimulus measures would be gradually reduced. The global stock market experienced a rapid downturn, and the almost constant decline only ended in the last week of June. During July, the stock market experienced a strong upward trend again, when the US Federal Reserve emphasised that the possible reduction in economic stimulus measures would occur slowly and in several stages. The European Central Bank also stated that it saw no need to tighten its monetary policy for a long time. Otherwise, there was plenty of financial data published in July that was better than expected. This assisted the equity market towards a new upward trend. The last quarter of the year was also good for the equity market, even though the domestic problems in the United States did cause some uncertainty during October.

The value of the equity portfolio measured, according to the market value, increased from the 5.9 billion euros at the start of the year to 6.5 billion euros. At the end of the year, 33.8 (32.0) percent of VER’s equity portfolio was managed as direct investments, and 66.2 (68.0) percent was invested through funds. At that time, VER had direct-equity investments in 160 (154) companies and holdings in 61 (60) funds.

Other investments

The return on other investments was 5.7 percent, while in 2012, it was 3.5 percent.

2013 was a good year for VER's other investments. The return from the whole portfolio for the year was 5.7 (3.5) percent. The returns were clearly positive in all asset classes. The highest returns at 8.1 percent came from private credit funds investing in unlisted bonds. Infrastructure funds returned a profit of 3.7 percent.

In private credit investments, the returns from the mezzanine funds, in particular, were excellent. As with last year, the strong stock market supported the positive development of returns for private equity investments. The change in the market sentiment of real estate investments was visible in the clear improvement of returns, compared to the previous years. In the absolute return portfolio, the returns varied by strategy. The returns of the equity strategies were excellent overall, while the CTA funds, where market trends are modelled using quantitative methods, showed the poorest performance during the year.

Other investments at VER consist of real estate funds, private equity, private credit and infrastructure funds, as well as absolute return funds. Private credit is a new asset class established at the start of 2013; the funds investing in debt were transferred there from the private equity portfolio, as were the debt funds in private equity fund format from the absolute return portfolio. At the end of 2013, the share of other investments in the VER portfolio was 8.5 percent, with a neutral allocation of 9.0 percent. The market value of the portfolio was 1,392 (1,080.2) million euros. The value of uncalled commitments was 516.5 (466.8) million euros. Of the total invested assets, absolute return funds accounted for 35.3 (25.7) percent, indirect real estate investments for 33.4 (39.7) percent and listed real estate investments for 1.2 (1.5) percent. Private equity funds accounted for 15.3 (22.4) percent, infrastructure funds for 9.5 (10.7) percent, and private credit funds for 5.3 percent of the invested assets. During the year, new investments were made in 15 funds.

The State Pension Fund (VER)

Established in 1990, VER is a fund outside the State budget. The State uses VER's proceeds to prepare for the financing of future pension liabilities and the balancing of pension costs.

VER has the character of a fiscal buffer. The assets of VER are not used directly for paying pensions; instead, all pensions in the State pension scheme are paid through State budget allocations.

The transfer of funds to the State budget has been a crucial factor in regulating VER’s growth. The transferable amount is specified by law, and it is 40 percent of the annual State pension expenditure. In 2013, the amount transferred was 1,678.3 (1,603.7) million euros. The budget transfer increased by 74.6 million euros from the previous year. The increase was due to increased State pension expenditure. By the end of 2013, a total of 22.7 billion euros in VER assets had been transferred to the State budget.

VER’s income in 2013 consisted of employer and employee pension contributions within the State pension scheme, income from interest, and investment returns. Pension contributions amounted to 1,628.0 (1,633.0) million euros, of which 747.9 (741.3) million euros came from government agencies and 880.1 (891.7) million euros from other pension contribution returns, mainly from local authorities and employees. Pension contribution income was 5.0 million euros lower than in 2012. Additionally, VER received 5.8 (5.8) million euros in unemployment insurance contributions.

The total operating costs of VER amounted to 7.0 million euros, which is 0.04 percent, in proportion to the average capital during the year.

VER employed a permanent staff of 22 people at the end of the year.

Established in 1990, VER is a fund outside the State budget, whose proceeds the State uses to prepare for the financing of future pension liabilities and the balancing of pension costs. VER is an investment organisation, and it is responsible for the professional investment of the State pension assets. At the end of 2013, the market value of VER's investment portfolio was 16.3 billion euros.

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