nrpn: Keva has probably been through a more turbulent year than most institutional investors – the pension fund returned -20.6 per cent in 2008. Why did you suffer so severely?

We have a very long-term investment strategy. Since we don’t have any short-term regulation at all, we are free to decide on our allocation and investment policy solely based on our long-term considerations. Naturally, that leads us to having a policy that is rather risky. Such a policy wasn’t very good last year.

nrpn: Did you make any significant changes to your asset allocation last year or were they more a result of the market?

It was almost exclusively due to market fluctuations. We don’t tend to move very far from our strategic neutral allocation. Last year, that meant that we had a higher equity allocation than most, although it was extremely low for our standard. Our neutral allocation is around 50 per cent of listed equities, but we went a long way beyond 40 per cent – to around 35 per cent equities at the lowest. That was really extreme for us and due to changes in market values – not active selling of equities from our part.

While last year was terrible, this year has, for the same reason, so far been quite good.

nrpn: Have last year’s losses made you rethink your investment strategy?

Yes and no. Fully independent of last year, it was time to go through our whole strategy. That has to do with our long-term financial plans, our pensions administration and the work with our partners. A new investment strategy will also be a part of this exercise. Since we are doing this review, we are trying to learn something from last year and will probably do some things in a different way.

nrpn: What implications will that have on your investment strategy?

The most important change that is taking place is that it looks like we are going to get rid of the idea of having a fixed long-term strategic allocation. We are moving in the direction of having a more dynamic strategic asset allocation. It will still be strategic in taking account of various long-term aspects, both of investment market but also our general financial planning. But it will not be like our present strategic allocation, which is fixed for a period of a few years. We will try to combine the long-term characteristics of various assets with the more short-term expected returns, which can be different from the long-term features due to the market outlook, inflation and so on.

nrpn: Will you still have a long-term strategic allocation to work towards?

That’s a very good question. We will probably have one on an analytical level but not on a decision-making level. Having a long-term view of what the allocation may look like if there were no short-term aspects will help us formulate our actual allocation. At the same time, I believe that you shouldn’t be too carried away by short-term characteristics.

nrpn: Have you received any feedback or comment on your losses last year?

Not that much. There has been some critical media coverage, which of course is understandable. Among the bigger pension funds in Finland, we had the worst returns. But I’ve been positively surprised that our actual stakeholders – our board, but also local governments and employees – have understood our long-term policy and our reasoning that to have high long-term returns, you need to take risks.

nrpn: Not only has Keva made hefty losses last year, it has also been associated with a political election financing scandal that led to the resignation of the company’s CEO. How has that affected the reputation of Keva?

The scandal in the summer has not really hurt us among people who have something to do with us, but has probably worsened our reputation among the public. The local governments seem to be fully confident in our actions. This morning, I heard the result of a recent study of finance directors in the local government sector and I was surprised with their feedback. In fact, the results were so good that we cannot publish them ourselves – it would make us sound like North Koreans. We don’t have any reliable information from our members, but we haven’t heard much criticism from them.

nrpn: What other challenges is Keva going through?

We used to plan our investment strategy purely on investment returns and have been rather privileged in being able to do so. We are sort of a buffer fund, but not really one since we also have real pension liabilities. On the other hand, we don’t try to be fully funded, only about 25 per cent funded. Now, we are moving closer to a period when our pension expenditure seems to exceed our contribution income. We will have to take into account different possible scenarios about how our liabilities will develop in the future and have to find portfolios which match to different scenarios. These unsure developments add a big complexity to our analysis.

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