Finnish Pension Companies – Deserved Criticism

Some 20 and 30 years ago, your correspondent published various articles in several of Finland’s national media about the unnecessary high costs and poor investment policies of the Finnish pension system…

Then it was estimated that these bodies paid around 1.25% of their €100 billion investment funds for their management, other staff, and administrative costs plus what they pay to outside fund managers and banks that handle their investment business. The total amount was then estimated to equal some €1 250 000 000, which is equal to what 50 000 workers get paid each year then!

The pension companies called me after these articles were published and asked me to tone down the criticism, which I refused to comply with. I am an independent financial expert with deep understanding of both finance and investment.

The total amount of investment funds for our pension system for working people at the end of last year was around €244 billion. The share of private sector managers was €154 billion, and the share of public sector managers was €90 billion.

The big difference between how they invest the pension funds then and now is that the funds have around 15% of their investments in Private Equity Funds or Hedge Funds that today cost according to their own calculations around some €2,500,000,000 – yes that is correct €2,5 billion which is about what 72 000 people earn in one year.

Breakdown of Total holdings of Finnish pension funds:

Your correspondent estimates that the same 1,25% in total costs is still being paid for staff and administrative costs and for most of their fund managers for the remaining 85% of the funds under management, a sum that equals around €207 billion! That means that they are paying some €2 00 000 000 extra on top of the €2 500 000 000 each year!

That is a grand total of €4 500 000 000 which is what some 128 000 workers earn each year!

Now, decades later, not much has changed, and certainly not for the better in the pension sector. Even though the pension system is basically well-structured under various laws, there are too many expensive separate bodies doing basically the same thing and investing too many low-yielding highly risky assets. It needs to be centralised and removed from rent-seeking private sector players.

As mentioned above, there is no big differences between the investment managers, the investment assets, or between the annual results. Nor do staff policies cause much variation since large parts of the portfolios are outsourced to third party managers at home and abroad.

This means that there is no clear advantage in having many small bodies managing the funds because there is very little extra diversity to be secured that a single manager could easily achieve by consolidating the assets under one roof with huge cost savings, as is the case in Singapore and Norway…

… and these pension savings would have earned much bigger returns in a diversified portfolio of equities without their loans to big companies, and bonds, and real estate investments in our home market!

The above cost savings and higher returns from more long-term investments in equities would have guaranteed a much higher pension for workers which today is around 40% to 45% of their last salaries. The calculations do indeed show that pensions could be close to 80% to 90% of last salary, also giving the government a huge source of income tax.

Politicians in general have not got a clue about pension fund management – they have only been blinded by the banking and investment lobby that has benefited generously from poorly designed pension laws. You must understand that the financiers can afford to finance the right-wing parties since they have the cash!

Another reason for the lack of reform is the annual nonsense when the pension funds publish a consultant’s review of their activities where they earn top marks for excellent management. The only problem is that these reviews are planned and purchased by the pension companies and the folk that regulate them. Many of these consultants are not independent from the big players in this sector. They work for both sides and are directly or indirectly connected with the entities they are asked to review! Thus, their reviews are based on calls where they are asked to review the activities of the pension bodies in relation to the current regulations, and they seldom, if ever, give recommendations about best practices or needed reforms. Such reforms would undermine the very jobs of fund managers and their regulators!

I suppose that we must wait another few decades for radical reform…

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