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The pension system in Finland: Institutional structure and governance. Keith Ambachtsheer Adjunct Professor of Finance, Rotman School of Management, University of Toronto Director, Rotman International Centre for Pension Management January 7, 2013. FINNISH RETIREMENT INCOME SYSTEM. - PowerPoint PPT Presentation
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The pension system in Finland:
Institutional structure and governance
The pension system in Finland:
Institutional structure and governance
Keith AmbachtsheerAdjunct Professor of Finance, Rotman School of Management, University of TorontoDirector, Rotman International Centre for Pension Management
January 7, 2013
Keith AmbachtsheerAdjunct Professor of Finance, Rotman School of Management, University of TorontoDirector, Rotman International Centre for Pension Management
January 7, 2013
Comprehensive and robust
Adequate pensions
Covers entire workforce
Facilitates labor mobility
Effective integration of system components
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FINNISH RETIREMENT INCOME SYSTEMFINNISH RETIREMENT INCOME SYSTEM
The Pension System in Finland, Ambachtsheer, January 2013
How is the system financed?
Institutional structure and ‘value for money’?
Institutional governance?
Investing outside vs. inside Finland?
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FOCUS FOR REPORT – PART 2FOCUS FOR REPORT – PART 2
The Pension System in Finland, Ambachtsheer, January 2013
Current finance sources: 75% pay-go, 25% pre-funding
How should this ratio be steered?
Do the PIC solvency rules foster unnecessary ‘short-termism’?
Move the 150B Euros asset mix from 45-55 to 80-20?
The Pension System in Finland, Ambachtsheer, January 2013
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RETIREMENT INCOME SYSTEM -FINANCE ISSUESRETIREMENT INCOME SYSTEM -FINANCE ISSUES
Total annual investment costs: ½% of assets...or about 700M Euros/yr
Similar to cost experience of an international peer group
Bulk of costs (2/3rds) relate external fees for private markets and hedge fund investing
Finnish internal oversight/executive/control functions under-resourced
The Pension System in Finland, Ambachtsheer, January 2013
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‘VALUE FOR MONEY’ FACTS – INVESTMENTS‘VALUE FOR MONEY’ FACTS – INVESTMENTS
The Pension System in Finland, Ambachtsheer, January 2013
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Table 1Table 1
The Pension System in Finland, Ambachtsheer, January 2013
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Figure 1. FPF investment costs vs. global larger and smaller fund peer group investment costsFigure 1. FPF investment costs vs. global larger and smaller fund peer group investment costs
The Pension System in Finland, Ambachtsheer, January 2013
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Figure 2. Benchmarking investment function compensationFigure 2. Benchmarking investment function compensation
Aggregate Finnish fund marginally outperformed its benchmark (2007-2011)
Benchmark included 1/3rd inside-Finland weighting
Finnish equities performed poorly during 2007-2011
Finnish funds underperformed intl. peers by 1.5%/yr (2007-2011)
The Pension System in Finland, Ambachtsheer, January 2013
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‘VALUE FOR MONEY’ FACTS – INVESTMENTS‘VALUE FOR MONEY’ FACTS – INVESTMENTS
The Pension System in Finland, Ambachtsheer, January 2013
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Figure 3. Global policy returns – quartile rankingsFigure 3. Global policy returns – quartile rankings
Aggregate per member Finnish ben. adm. costs: 107 Euros/yr (440M Euros total)
Aggregate international peer group experience: 60 Euros/yr
Finnish costs higher because: 1. Scale (63%), 2. Complexity (23%), 3. Other (14%)
55% of Finnish costs (59 Euros) related to serving employers vs. only 10% (6 Euros) for international peer group
Major cost offset: Finland combines Pillar 1 and 2 ben. adm....other countries do not
Aggregate Finnish Member Services ranking: 70 vs. 75 for international peer group
The Pension System in Finland, Ambachtsheer, January 2013
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‘VALUE FOR MONEY’ FACTS – BENEFIT ADMINISTRATION‘VALUE FOR MONEY’ FACTS – BENEFIT ADMINISTRATION
The Pension System in Finland, Ambachtsheer, January 2013
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Figure 4. Total pension administration costs per active member and annuitantFigure 4. Total pension administration costs per active member and annuitant
The Pension System in Finland, Ambachtsheer, January 2013
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Figure 5. Total service scores, score out of 100Figure 5. Total service scores, score out of 100
Significant ‘economies of scale’ opportunities (inv. and ben. adm.)
On inv. side: 1. In-source high-cost mandates, 2. Strengthen internal oversight/executive/control functions
Value of PIC competition questionable. Collaboration strategies likely offer better prospects.
The Pension System in Finland, Ambachtsheer, January 2013
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‘VALUE FOR MONEY’ – CONCLUSIONS‘VALUE FOR MONEY’ – CONCLUSIONS
Investment policy shift from 45-55 to 80-20: € 1.5B/yr
‘Value for money’ shift in investment structures: € 300M/yr
‘Value for money’ shift in benefit administration structures: € 100M/yr
Total of € 1.9B equals 1% of Finland GDP
The Pension System in Finland, Ambachtsheer, January 2013
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POTENTIAL ECONOMIC GAINSPOTENTIAL ECONOMIC GAINS
Global pension governance debate: “Representation vs. Skills/Experience”
Resolution: not “either-or” but “and-and”
Practical convergence strategy: build collective requisite skills/experience matrix involving all stakeholders
The Pension System in Finland, Ambachtsheer, January 2013
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INSTITUTIONAL GOVERNANCEINSTITUTIONAL GOVERNANCE
Close historical connection between Finnish economy and pension system
Increasing outward focus...but investments still 1/3rd Finnish
Health of 75% pay-go part of system already relies on Finnish economy
Accelerating outward-looking focus would move pension assets further away from the reaches of Finnish government and corporate sectors, and increase exposure to international best practices
The Pension System in Finland, Ambachtsheer, January 2013
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FROM LOOKING INWARD TO LOOKING OUTWARDFROM LOOKING INWARD TO LOOKING OUTWARD
The Pension System in Finland, Ambachtsheer, January 2013
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SUMMARY OF REPORT – PART 2 SIX SUGGESTIONS/RECOMMENDATIONS
SUMMARY OF REPORT – PART 2 SIX SUGGESTIONS/RECOMMENDATIONS
