Pension waste and Willful Blindness

In an earlier paper covered in FinnishNews, there was a presentation of the high cost of running three different pension companies in Finland that have high operating costs relative to similar funds in Singapore and Norway – both small successful countries…

Finland’s pension system covers every working person in Finland and the organisation of the system is of great consequences for the whole population. There is no point in complaining about low pensions when you are retired – you must act now to protect your own pension interest. We you are retired, or nearing retirement, it is too late to demand change. In general, most people will be lucky to receive 50% to 60% of their last net salary as an after-tax pension.

The present system is made to be especially complicated when three companies, together with two public pension entities, are all running with big separate supervisory boards, management boards and executive teams and their own operating staff.

This has been the traditional setup for decades and it appears that it suits the vested interests of those who are receiving comfortable salaries and bonuses within the current pension system. There have been no changes in their organisation to make them system more cost efficient and agile. In fact, the opposite has happened and no matter how you look at the big picture you can only see hugely wasteful systems that appear to be subject to wilful blindness or negligent management. It is time for a big clean up…

Just look at the numbers – the three biggest companies Ilmarinen, Varma and Elo have €51 billion, €49 billion and €25 billion under management, and yet they employ 616, 537 and 532 staff respectively. These three big companies have €125 billion with a staff of 1685 people each one duplicating the other in investment activity and pension management! The Norwegian Oil fund employs just 300 people with a fund that is some 10 times bigger than the three biggest Finnish pension funds together – these three companies employ 5 times more people! The Finnish companies still have to work with the members, workers and the pensioners, but the Finnish pension system is all set in laws and regulations and certainly does not demand active contact with these customers and it certainly does not need all that staff.

Digital solutions and streamlined organisations appear to be far from being implemented…

But look at their management – oh the numbers are beyond belief!

Imarinen has 30 members in their Supervisory Board, and some 12 or 18 in their Board (the numbers are rather unclear in their latest report) and 10 directors in their Executive Management.

Varma has 31 in the Supervisory Board, 15 in the Board and 10 in the Executive Management, while Elo has 42, 15 and 10 respectively.

That gives a grand total of 181 people sitting in the three bodies in every meeting! That is a grossly bloated management system that looks more like the Chinese Communist party at their annual Party Congress.

You will not find any stock exchange company with such an organisation! No organisation can operate efficiently with such huge numbers. Who in fact is shouldering responsibility when 181 people are chatting endlessly? It is just like the US mortgage market that involved the whole networks of bankers, insurers, brokers and supervisors were only too happy to carry on as if nothing rotten is going on…

Then there is the question – why do CEOs and other executives of the company members and representatives of the Unions (employers and employees) have to sit in the management bodies?

These people can lobby the government like any other vested interest. They do not need to be involved in the management of the pension funds! In fact, the whole system is rife with potential conflicts of interest because the member companies can benefit from real estate deals, equity investments and cheap loans from these pension companies, as well as banks can benefit from selling their banking services! If your bonus depends on the share price what better position to be in than to sit in the board of the country’s largest investors!

If every well-run private company wants to keep a strict control on costs, then why do the Employers Unions want to sit along with hundreds of others in the management of the pension companies. Could it be that they all receive rather juicy annual fees without too much work?

Not only are the management too many in number but their operations must be supervised by the public sector which is another layer of organisation. Putting the pension system into a single public entity that would outsource fund management would solve most of these issues and substantially reduce costs. A reduction in costs means higher returns and bigger pensions.

The public sector has two big pension funds and reasonably efficient organisation. The municipal system that has more individual clients than any of the 3 private funds has a total staff of 530 and a fund of €56 billion and a management of 30 in the Supervisory Board, 11 in the Board and 8 in the management.

It is surprising that the present government is not looking for cost efficiencies by reforming this outdated pension system.

Just recall what happened in the US mortgage markets over many years that culminated in the 2008 financial crisis: “There was just a horrible deterioration in the moral fabric of people. And a lot of wishful thinking. But the structure of the global industry means no one feels responsible.” So writes Margaret Heffernan in her book called “Wilful Blindness: Why We Ignore the Obvious” (p. 168). Simon & Schuster UK. It is a book worth reading…

The story of the Finnish pension system is not quite so dire as the US mortgage market, but the comparison is not so far removed. Every euro wasted on bloated pension organisations and inefficient fund management mean lower pensions for all Finnish workers.

Photo: Wikipedia Commons (中共十八大会场(美国之音 记者东方拍摄 )

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