In January 2007 four major reforms to the €108.6bn Finnish pensions industry will come into effect. Pension institutions will be regulated by new investment rules based on the prudent person principle and the management structure of Finnish pension insurance companies is to be clarified with an increase in the responsibilities of the board. Thirdly, new limits are to be introduced for the transfer of assets and liabilities from pension funds to insurance companies and vice versa in a bid to increase competition and the country’s insurance supervisory authority is to be strengthened.

Matti Leppälä, director at the Finnish Pensions Alliance (TELA), told nrpn that the new proposals form the first major reform package in Finnish pension regulations since 1997. “This time, the package of reforms was particularly complex and challenging. The coming reforms will create a completely new pensions landscape in Finland,” he says.

While the decision to liberalise the investment regulations of local pension institutions was well received, last minute additions regarding the management structure of local pension companies have caused concern. The reforms, drafted by Matti Louekoski, director at the Bank of Finland, who was appointed to investigate the needs of local pension companies, proposed that the board should be strengthened and that the managing directors of pension insurance companies could not also be board members.

Accordingly, from January 2007 the chairman and two thirds of the management board of an insurance company must also have no involvement in the day-to-day management of their company or any other pension fund or pension company. The new regulations will also prevent board members from holding the same role for other insurance companies.

A chairman of one insurance company, who did not want to be named, disapproves of the decision to stop chairmen from leading more than one insurance firm. “It is unwise to constrain free choice in the election of a chairman for the board of a pension company where the advantages of a wide expertise in the insurance and investment industries is very important, especially as the majority of the board is not affiliated with other insurance companies,” he says.

“The nomination committee, which chooses the chairman should be given the opportunity to suggest the best and most knowledgeable person for the company. The new regulations will actually require more expertise from board members. From our point of view, the matter is complicated because we have had the same arrangement regarding the duties of our chairman for the past 40 years, since the work pension system was launched. And no one has had any problems with it.”

In the meantime, the arrival of the prudent person principle in Finnish pension investments has received an enthusiastic welcome. From January 2007, Finnish pension institutions will be allowed to invest an increasing share of their assets in equities. The limit of equity investments, which is 25 per cent today, will be increased to 35 per cent over the coming five years by allowing an annual increase to equities of 2 per cent. The new regulations will also liberalise investments in alternative asset classes and in non-OECD countries. They are expected to increase the annual returns of pension institutions by approximately 1 per cent and alleviate the pressure on insurance fees.

“The new regulations represent a long-awaited move in the right direction,” says Hannu Hokka, managing director of the €920m VR Pension Fund. “In the future, local pension investors will be punished much less for investing in alternatives, such as hedge funds and private equity.”

The new limits on the transfer of assets from pension funds to pension insurance companies have also been warmly welcomed. Until the beginning of the year, when a company pension fund with a surplus of 30 per cent was dismantled, the regulations allowed 11.8 per cent of the solvency margin to be transferred to a new insurance company. The employer received the remaining 18.2 per cent.

If, on the other hand, an employer with an insurance contract established a pension fund of its own, it received only 11.8 per cent of the functioning capital with the rest remaining at the insurance company. In January 2006, the ministry of social affairs and health raised the limit on the transfer of assets to 19 per cent, and in July to 21.6 per cent for all pension funds. The rate will be increased to 22.5 per cent from 1 January 2007.

“This is a major improvement for Finnish pension funds,” says Jouko Bergius, managing director of the Pension Fund Alliance (ESY). “The old system was very unfair for pension funds and reduced the ability of company pension funds to compete with insurance companies. Recently, even the Finnish Competition Authority had started inquiring into the inequality of the system.

“At the moment, we are also waiting for the ministry of social affairs and health to complete its work on contribution-based supplementary pensions. At present, Finnish funds are not able to offer supplementary contribution-based schemes. We expect the authorities to change this before the next parliamentary elections,” adds Mr Bergius.

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