“Despite the economy coming to a grinding halt, Varma’s solvency remained at a good level. This indicates that the risk buffers used to secure the pension system are working as they are supposed to,” says Varma’s CEO, Risto Murto.
Varma’s solvency capital amounted to EUR 7.9 (11.6 on 1 Jan) billion, which is 1.6 times the solvency limit. Strong solvency ensures that even during a weak investment year, funded pension assets do not need to be used to pay out pensions.
The return on Varma’s investments during the first quarter of the year was –10.0% (5.1%), as the equity markets experienced a worldwide downturn following the spread of the coronavirus pandemic.
“The equity market plunged in March at an unheard of rate, and there were moments when liquidity disappeared almost entirely from the capital markets. By reducing equity weights, Varma lowered its risk level to secure solvency also in these extraordinary conditions,” says Varma’s CIO Reima Rytsölä.
“The equity market has clearly recovered since the end of March. Time will tell, however, whether the equity market will experience a second wave of decline,” says Rytsölä.
Central bank measures prevented a financial crisis
Of Varma’s investments, real estate yielded a positive return of 1.3% (0.7%). The return on equity investments fell to –14.6% (10.0%), and the return on listed equities was –21.1% (13.1%). The return on fixed income investments was –3.6% (1.9%). The return on hedge fund investments was –12.7% (2.0%).
The average 10-year nominal return on investments is 4.3%.
“Despite the rate at which it fell, the decline in the investment markets is so far not exceptional in terms of how low it fell. The restrictions and economic uncertainty that followed the coronavirus epidemic have been a bigger crisis in people’s day-to-day lives and the real economy than they have been in the financial markets,” says Murto.
“In terms of economic recovery, the main factor will be how fast we can lift the restrictions. The central banks’ stimulus measures, in particular, have been rapid and substantial, which has slowed the expansion of the economic crisis into a financial crisis,” he adds.
Small-scale entrepreneurs have applied for more payment deferrals than employer companies
The coronavirus epidemic has had impacts on Varma’s client companies and its tenants’ businesses. Varma has extended the term of payment for its TyEL and YEL insurance customers. Eight per cent of Varma’s TyEL customers and 14 per cent of YEL customers are making use of the payment period flexibility. The applications for an extended term of payment highlight companies operating in the Uusimaa region and the hotel and restaurant industry, as well as speciality shops.
Varma will not collect rent from its restaurant tenants for a period of two months, since they have been forced to close down their business premises by a parliamentary decision. Entrepreneurs facing an especially difficult situation can also take advantage of rental payment flexibility for their business premises.
As of the start of May, employer payments will be temporarily reduced. Varma is prepared for the reductions to have an impact on the end-of-year accrual of premium income.
Varma to cut emissions of its rental housing stock nearly in half by 2023
Varma will switch to using heat pumps as the heating source for a large part of the company’s rental housing stock. Heat pumps and solar panels will be installed in 36 apartment buildings, which means the emissions from Varma’s total housing stock will decrease by an estimated 48% by 2023. In some apartment buildings, geothermal heating will entirely replace district heating.
The energy-saving measures are part of Varma’s efforts to achieve its climate targets. Varma’s goal is to reduce the carbon dioxide emissions of its direct real estate investments by switching to fossil-free heating and electricity by 2030 and 2025, respectively.
Partial old-age pension retains its popularity
Varma performed well in customer acquisition in the first quarter; the net amount of annual premiums written transferring to Varma from other pension companies is EUR 18 million.
New pension decisions made at Varma by the end of March totalled 6,005, which is roughly 4% less than in the corresponding period last year. Partial early old-age pension, which was introduced at the start of 2017, remained popular – Varma received 722 new applications for this pension type during the first quarter. The number of disability and rehabilitation applications decreased slightly year on year.
At the end of March, Varma provided insurance for 533,000 (542,000 on 1 Jan) employees and self-employed persons and had 343,000 (344,000 on 1 Jan) pension recipients.
Varma Mutual Pension Insurance Company is a responsible and solvent investor. The company is responsible for the statutory earnings-related pension cover of some 900,000 people in the private sector. Premiums written totalled EUR 5.3 billion in 2019 and pension payments stood at EUR 5.9 billion. The company’s investment portfolio amounted to EUR 43.6 billion at the end of March 2020.
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