The return on Varma’s investments remained on a steady growth track in the third quarter of the year, after market turbulence in the beginning of 2018. The nine-month return on Varma’s investments was 3.5% (6.2%) or EUR 1.6 billion.
“The investment returns showed resilient growth despite increasing global economic and political risks. Especially US equity investments yielded good returns,” says Varma’s President & CEO Risto Murto.
At the end of September, the market value of investments was EUR 46.9 (45.4) billion, and the solvency capital strengthened to EUR 11.6 (11.4) billion.
Equity investments generated 6.6% (9.6%), and of those, listed equities yielded 5.5% (10.8%). Private equity investments generated the best returns, at 12.2% (4.1%). In January–September, the return on real estate investments, at 4.0% (3.1%), also improved year-on-year. Hedge funds yielded consistent returns at 4.9% (5.3%). The return on fixed-income investments was negative at -1.2% (3.6%) in the challenging market environment.
“For a long time, the US equity market remained immune to the trade war, and its effect did not impact the nine-month returns. Since September, however, the long-term interest rates have risen, which, together with the trade war, caused the equity market to fall. Time will tell whether this is a healthy correction or a pivotal point in the cycle,” says Varma’s Chief Investment Officer Reima Rytsölä.
Varma receives recognition in a global climate index
Varma ranked fifth in a global climate index by AODP (Asset Owners Disclosure Project), which assesses the world’s 100 largest global pension funds’ approach to climate-related risks and opportunities. In recent years, Varma has been developing the climate-friendliness of its investment portfolio.
“At Varma, climate issues are an integral part of the investments’ decision-making process. We have divested our direct equity investments in coal-dependent power companies and focussed our investments on low-emission industries. As a major asset owner, we have a duty to lead by example and show how an investor can contribute to climate efforts,” Rytsölä adds.
New customers especially from small companies
According to application data, EUR 17 million in premiums written have been transferred to Varma from other earnings-related pension companies during 2018. Customer acquisition work was especially successful in small businesses. The core of customer work is workability management, for which Varma is constantly developing tools, for example for the early identification of workability risks.
As of the beginning of next year, Varma will start using the Incomes Register to receive the wage information from the employer in close to real time. This will speed up the processing of insurance contributions and pension decisions.
At the end of September, Varma provided insurance for 555,000 (537,000 on 1 Jan) employees and self-employed persons and had 343,000 (343,000 on 1 Jan) pension recipients.
Lower birth rate challenges the pension system
Recent years have been favourable for the Finnish earnings-related pension cover. Pension assets have reached a new record thanks to strong investment returns. Improving employment supports the accrual of pension cover also for future pensioners.
The 2017 pension reform bolstered the sustainability of the earnings-related pension system. The biggest surprise that challenges the estimates is the rapidly declining birth rate.
“We are currently seeing the smallest age cohorts being born since Finland became independent. The rapidly declining birth rate will inevitably challenge the earnings-related pension system, although the impacts will not be seen until decades later. We will need a better understanding of how long-lasting the decline is,” Murto says.
Varma Mutual Pension Insurance Company is a responsible and solvent investor. The company is responsible for the statutory earnings-related pension cover of 900,000 people in the private sector. Premiums written totalled EUR 4.9 billion in 2017 and pension payments stood at EUR 5.5 billion. Varma’s investment portfolio amounted to EUR 46.9 billion at the end of September 2018.
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