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Wednesday 16 October 2019

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Coping under pressure

Written by Lauren Weymouth
May 2014

Nordic countries may not form a single entity politically, but when it comes to pensions, it is hard not to pigeonhole ‘the Nordics’ as just that. With these countries ranking high in the European pension space, their regional name has become less about geographical location and more about consistently strong performance.

In April, Allianz Asset Management released their 2014 Pension Sustainability Index, of which Sweden, Norway, Denmark and Finland all, unsurprisingly, featured towards the top.

Of the top 10 sustainable pension systems in Western Europe and North America, Sweden came out top, Norway second, Denmark fourth and Finland tenth. Throw the rest of the world into the equation and Australia and New Zealand were the only two competitors.

The Allianz International Pension Papers, released with the sustainability index, highlight how both Sweden and Norway benefited from their solid public finance situation. “Norway even succeeded in surpassing the Netherlands due to its better fiscal position,” says the report. “Norway’s high legal retirement age and moderate aging demographic also assisted in awarding the country its high ranking.”

However, the trouble with being at the top is there is very little room to advance, but an incredible amount of pressure to do so. With a constant influx of regulatory and statutory reforms such as the preparation for Solvency II-style regulations for pensions and the IORP II Directive, there are more challenges facing the region than ever before.

Narrowing the path

As a result of the economic fragility surrounding the Euro area, funds have been looking to collaborate to increase returns and ultimately, narrow the market competition.

US Investment management firm Eaton Vance, which has been building up a presence in the Nordics, says it has seen a huge amount of consolidation happening across a “critical European region”.

The firm’s business development director, Sebastian Vargas, says despite the homogenous look, Nordic markets are quite diverse. “One common development in these markets is the consolidation into fewer players,” he says. “We have seen some of that consolidation in Denmark where various pension managers have merged, and in Finland with pension insurance companies merging; the merger of Pension Fennia and LocalTapiola being the most recent example.”

Earlier this year, Pension Fennia and LocalTapiola merged to form Elo Mutual Pension Insurance Company. As a result of the merge, the fund recorded a 1.1 per cent return on investments in the first quarter of 2014. The total value of investments was €19.05 billion despite the crisis in Ukraine increasing market uncertainty.

It is mergers like this that are, as Vargas describes, splitting the market into “fewer players”. Denmark currently has 25 schemes and industry figures are now predicting this could decline further, to potentially 10-15 schemes within the next decade. This is also happening across Finland where regulation has decreased the amount of funds from between 60-70 to around 20 today.

One of the main reasons for such a decline is that regulation across the region encourages moving fund assets and liabilities to pension insurance companies – Elo Mutual Pension Insurance Company being the perfect example of this.

While consolidation is happening to generate higher returns, it appears funds going it alone are not suffering either. According to Norway’s Financial Supervisory Authority, Finanstilsyne, Norway’s pension funds recorded investment returns of 10.7 per cent last year, showing a rise of almost three percentage points from 2012.

However, global investment manager T.Rowe Price says the consolidation is happening throughout Nordics because there is a huge pressure on both transparency and cost. Due to the decrease in pension plans, increase in consolidation and search for higher yields, the Nordics are, as Vargas describes, under pressure to deliver and struggling to find the balance between the importance of cost and returns.

“The focus on cost is higher than the focus on return right now,” says T.Rowe Price director of business development Jan Eggertsen. “There’s a lot of competition in the market surrounding cost because members want to be shown that they’re only paying a certain amount of money. We’d rather them focus on how much returns they get, but unfortunately that’s not on the radar right now.”

Alternative investment

At the end of March, the European Commission released its newly revised IORP Directive focusing on extensive new pension scheme governance requirements enhancing the flow of information to scheme members.

The proposals set out by the EU Commission would change existing provisions on investment restrictions to make sure occupational funds remain free to invest in infrastructure – a key investment space.

Pensions Danmark CEO Torben Möger Pedersen says in such a low yield environment, it’s extremely important that Denmark, in particular, has been offered a large degree of freedom regarding its investment policy, particularly regarding infrastructure.

“In our part of the world, growth rates and interest rates will probably remain low for a sustained period and so the returns on equities will be restricted by the effect of low growth in profits,” he says.

“It’s important for our pension fund to have a large degree of freedom in this investment environment to be able to reallocate our portfolio into assets that can give our members returns substantially higher than government bond yields, but without stock market volatility.”

Eggertsen says that because directing assets into infrastructure is becoming such a common theme, returns are weakening. “The expected return for funding a bridge, for example, could be around 8.5 per cent, but if everybody wants to do it, the return is going to drop to around 5.5 per cent and the risk will be far too high compared to the return,” he warns.

Environmental investing specialists Kleinwort Benson says it is beginning to see a greater interest in environmental investment, a trend that it also believes will continue over the coming year.

“Many of the Nordic pension funds are increasing the integration of their ESG capabilities,” says Kleinwort Benson European business development Eric Bateman. “Nordic schemes are always at the forefront of this kind of investment approach, but what we’re seeing now is a greater move towards integration of ESG into the broader investments within the funds. Funds expect to increase that kind of investment outlook in the months to come.”

Preparing for the future

As well as adopting such strategies, it appears the region is also well prepared for the implementation of the Solvency II-style rules for pensions, which are set to come into effect in 2016.

“In Denmark, the FSA will implement the regime and will not wait until the rest of Europe are doing that,” says Pederson. Eggertsen also agrees that the rest of the Nordics are well prepared for the inevitable: “The whole industry is really healthy, meaning everyone has been able to live up to Solvency II. Even if it wasn’t implemented, they’d still be able to do that.”

However competitive the market may be and however many reforms may continue to take place, it appears the Nordics are, as Vargas describes, still “pioneers” within the pensions space. A desire to innovate proves that despite being at the top of their field, there is always room to grow.

Lauren Weymouth is News Reporter, European Pensions



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