It’s Time to Consolidate Finland’s Pension Funds

A number of readers asked FinnishNews why should our pension funds be centralised into one body because “this would place all the eggs in a single basket” thus reducing diversification and increasing risks.

Such a suggestion shows a that the readers did not understand the thinking behind the proposal that would actually increase diversification and reduce costs massively.

The present system means that we have several rather small pension bodies, small when compared to pension giants elsewhere in the developed world. Each private pension fund largely mimics the others, racking up high administration costs, and not taking advantage of lower management fees with large outsourcing contracts.

The basic idea has already been tried and tested in Norway, Singapore, and by many other large institutional investors for decades and it is extremely effective.

The proposal put forth by FinnishNews is that a single public pension fund (SPPF) should replace this rather messy collection of private and public pension funds. It would be run by a small team of experienced fund managers who would be responsible for outsourcing most of the funds to a group of Finnish and international fund managers whose selection would be based on professional experience and costs. 

The contracts would be large and allow the SPPF to secure the lowest possible management costs with the best names in the market. The estimated annual cost saving is in the order of 1% to 1,5% on the total under management which is around €220 billion. The resulting cost savings for lower management fees is between €2.2 billion to €3.3 billion and the reduction of annual administration costs is estimated to be around €200 million. Furthermore the public sector will also save an enormous amount of regulatory costs because it will not need to be regulated, only overseen by its board. 

As mentioned above, today’s system in Finland is based on a copy/paste system where the pension companies larger mimic one another without achieving any significant economies of scale. In fact the largest pension funds actually have invested together in a number of large projects in syndicates that they control! So much for diversification!

The fact that they are managed by the CEOs of big client companies, trade union leaders and politicians does not inspire confidence because most of them lack real expert knowledge of international investment activities gained over decades. Many of them have received university qualifications in economics and law but that was 20 or 30 years ago and now the investment markets have changed radically.

In a recent interview the employers’ union representing the SME sector, our biggest employers and fastest growing part of the economy, demanded radical centralisation of the pension system as described here. 

So far this demand has fallen on deaf ears because the business is so lucrative for those benefiting from jobs and postings in these companies. Your correspondent has written about this for over 20 years, but the relationship between politicians, regulators, the unions and the largest corporate members of the pension funds are too closely intertwined. Nothing has really changed in decades. It is instructive to note that foreign competition is non-existent in this sector. The market is effectively closed and non-competitive, while open to misuse that even the regulators appear to be unable to control effectively. 

It is time for the government to overhaul and ensure that paying pensioners receive the pensions they deserve and have paid for. It is time to stop, once and for all, the creaming off from the pension funds by these inefficient present private and public pension bodies. 

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