Six months after the new Finnish pension investment regulations came into force, Finnish pension fund companies have seized the opportunity to expand their allocations to equities and alternatives.

“The biggest change is the larger share that can now be invested in equities. In the next five years, our equities will increase by about 2 per cent each year,” says Jussi Laitinen, CIO at Ilmarinen, the €23bn mutual pension insurance company.

The headline feature of the new regulations is the higher permitted equity allocation, which has risen from 25 to 35 per cent. Over the next five years, the maximum permitted equity allocation will rise by 2 percentage points each year. The law construes equities very broadly, to include investments in hedge funds and private equity. The permitted allocation varies according to the company’s buffer and its returns. The new regulations also allow for a rise in non-eurozone investments.

“We are very pleased with the new regulations. It has been a big step forward and gives us better possibilities for diversification. But the regulations have not had any radical effect on our investments or resulted in any dramatic changes,” says Mikko Koivusalo, CIO at €26.9bn Varma.

The biggest increase in equity allocations among the pension funds took place last year, when equities increased from 32.8 to 39.9 per cent according to Tela, the Finnish Pension Alliance, but the trend has continued in 2007.

“We already changed our portfolio in 2006 in anticipation of the changes; we started increasing our equities and alternatives allocations. Our strong solvency buffer and good returns enabled us to do so,” says Mr Koivusalo. Varma increased its exposure to alternatives from 8 per cent to 12 per cent last year and its equity allocation to 46.3 per cent.

In the first quarter of 2007, the average equity allocation continued to rise, logging a 2.7 percentage point increase. The average portfolio now allocates 42.6 per cent to equities.

“The companies are happy with the new regulations and there has definitely been a change in asset allocations, especially in 2007. We have now got a record high in equity and alternative allocations,” says Matti Leppälä, director of international and legal affairs at Tela. “This is also the first time we have had the same set of regulations for all pension funds and companies in the private sector.”

The new regulations have also prompted interest in hedge funds and private equity. Investments in hedge funds have grown by about €4bn since 2004. Mr Leppälä told nrpn earlier this year: “Nowadays almost all pension investors in Finland have at least some exposure to hedge funds and private equity is also increasing in popularity.”

The pension fund companies have also taken advantage of the higher permitted non-eurozone allocation. This has risen from 10 to 20 per cent with the new regulations. The companies reduced their European investments in favour of non-eurozone investments by 3 percentage points in the first quarter of 2007. They now have an average of 38.6 per cent invested in non-eurozone equities, 28.6 per cent in Finnish stocks and 12.2 per cent in European stocks.

“The biggest trend has been non-eurozone investments, which have experienced a very distinct increase in investments. This especially concerns equities. Investments in Finland have remained quite steady, but all these trends will depend on the market. The pension companies currently have good solvency and can take more risk,” says Mr Leppälä.

The new investment and solvency regulations for Finnish pension institutions came into force in January 2007. They were drafted by a committee led by Kari Puro, the former CEO of Ilmarinen, and a group of industry specialists. The committee had been evaluating the need for reform of the existing regulatory framework since 2004 and published its report in 2006.

CL

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