Our pensions are too small

The Finnish pension funds have seldom been very honest with pensioners. Their representatives or stakeholders are their boards, their senior management and the over 100 of their administrative representatives from the employee and employer unions all know that the funds under their management are small in relation to most similar pension funds around the world.

Three big funds like to call themselves “private funds” have been playing games with pensioners for years. These three big ones are called Ilmarinen, Varma and Elo, and they exercise a lot of power in the Finnish economy:

  1. They have commercial and political power through their board positions and connections in many of Finland’s biggest public companies and banks. 
  2. They have political power through their relationships and connections with the main political parties in addition to their very effective lobby organisations. 
  3. They have very close relationships with the employee and employer unions, bodies that also have strong connections to the biggest political parties, with the exceptions of the Greens.
  4. They also have strong connections with civil servants in the various ministries that are meant to oversee and supervise their activities but the revolving door keeps this supervision muted because who knows what high paying job you could be prevented from receiving if you are too assiduous in exercising your supervisory duties.

The whole pension system in Finland is covered by one set of complex and protective legislation that forces employees and employers to make joint payments each month of some 25% of gross salaries into the pension funds. Current pensions to retirees are paid out of these funds, while a remaining amount is invested for future payments when working folk eventually retire.

The whole system is nicely closed and works smoothly with the above mentioned boards, senior management and the over 100 administrative representatives from the employee and employer unions all enjoying rather generous benefits.

In fact, it is so well organised that there are no foreign-owned pension funds operating in Finland. The whole system is so cleverly constructed between the three big funds that even the biggest foreign pension funds see no opportunities to enter such a closed market. 

These three funds, together with the state and municipal pension funds, largely replicate their investment strategies. The differences are minimal and their results are similar. Their asset allocations are also similar – they say that they must diversify their funds into several asset classes but the results are similar since they all use the same consultants.

They have large equity and bond investments which are separately managed at home and abroad with their annual investment costs, they claim, below 1% of the amount managed. The world’s largest funds make do with one-tenth of that amount. The impact of the claimed 1% annual cost reduces pensioners’ pensions by quite a large amount. The actual costs are challenging to measure because but judging from the results there appears to be leakage above this figure…

If you can invest at 3% real rate of return over 40 years, (this is the rate they claim they want to achieve open average each year), that means 6% assuming inflation is 3% on average over such a long period during which people work, then you would only need to invest 12% to 13% of your gross salary every year to receive most 100% of your last salary. 

In today’s pension system you must invest together with your company 25% of your gross salary and receive around 50% or 60% of your last salary as a pension. The calculation can be made on an Excel spread sheet quite easily, and because the funds in this system are inclusive of all working pensioners the assumptions are especially valid for such large groups.

It is estimated that around 30% of today’s payments into the pension funds goes out as pension payments to current retirees. Thus using that percentage, you can assume that 16% should be sufficient for much better pensions for current and future retirees – something close enough to the last salary as a pension!


There are three truths about investing over the long term that every fund manager knows:

  1. The bigger the fund in absolute terms the easier it is to demand and receive lower management costs. 

  2. The lower the costs in percentage terms the higher the return.

  3. The bigger his total compensation, and the higher administration costs, the lower the total return of the portfolio, which means that they eat up what pensioners should be receiving!

But you will never hear the above three stories from Ilmarinen, Varma and Elo because of truth number 3…

… and no matter how many times this column repeats these three statements, you can be sure that not one fund manager or other “Stakeholder”, or should we say “Steakholder”, will open their mouth because number 3 is where the beef is!

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