Private Fund Managers Merge, But Not Big Pension Funds

One large financial group here in Finland decided enough is enough, and decided to sell their fund management company to one of the smaller Finnish banks. The financial group, Taaleri, had not seen that this activity was sufficiently profitable even though they charged normal fees. They thus decided it was time to focus on more profitable lines of business like their Green Investment Funds.

Aktia Bank, the buyer, along with other financial analysts, stated that combining two fund management operations results in large cost savings. They come from reduced IT costs, a single back office and relatively lower compliance costs. These points were repeated in all the business media here as something that is so obvious…

… and yet not one financial analysts and not one major business media company has demanded that Finland’s three large “private” pension companies should be rolled into a single entity with one of the public pension funds to grab the same huge cost efficiencies. All of these three companies are operating under explicit legislation governing workers’ pensions and enjoy an implicit government guarantee. The government originally has outsourced the pension administration to these companies some 60 years ago, and since then private sector interests have grabbed power away from politicians to create a triad of three big companies that basically run a oligopolistic fund management group that is far from being cost competitive for the main beneficiaries, the workers and pensioners who pay for and receive pensions through their careers and in retirement respectively. 

This week has seen yet another head roll from the top of one of these companies. The CEO of ELO, one of the three big pension insurance companies, has suddenly resigned and there is talk about poor management… 

When Finland, along all others, are seeing financial resources being drained away by Covid-19 costs this would be a great time to reform this expensive pension management system. It makes no sense for working people and employers to contribute some 25% for monthly pensions savings when the final pension is well below what could be achieved with possible lower management costs. Higher pensions would also mean less housing and living subsidies for the aged in the long term.  

Readers should recall that 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. Smaller funds pay higher management costs to third parties.

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

  3. Small funds, big fund management salaries, and higher administration costs mean  lower total returns for 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!

Site Footer