The Finnish Local Government Pensions Institution (Keva) could start dipping into capital earmarked for investments to cover its spending as contributions fail.
“The current and coming years will see a growing share of pension expenditure being covered through returns on investments or by dipping into investment capital,” the pension noted in its earnings statement for the first half of this year.
The fund’s income contributions failed to cover all pension expenditure for the first time last year, with the difference funded through returns on investments.
Private equity has been a standout performer at the fund. The asset class, which accounted for 8 percent of Keva’s €52.1 billion investment portfolio as of 30 June, was its highest earner in the first half, generating a 7.3 percent return. The fund posted a 0.7 percent overall gain for the period, with the results hindered by a -0.2 percent return for fixed income and listed equities and equity funds.
Keva’s expenditure was €2.59 billion during the period, while contribution income was just €2.54 billion. From 1 January 2020, the private sector will have a greater role in the provision of healthcare and social services, potentially sparking a loss of pension contributions and creating pressure on Keva’s remaining members to increase their contributions.
“Besides the threat of trade wars, concerns about the sustainability of economic development as well as interest rate hikes, for example, are also casting a shadow over the markets,” chief investment officer Ari Huotari said in the statement.
Keva had posted a -0.4 percent return for for the three months to 31 March. Private equity had again been its highest performer in the first quarter at 2.2 percent, while its overall performance was weighed down by a -2.5 percent loss in listed equities and equity fund assets.
“The work capacity of employees needs to be maintained at all levels to ensure that costs arising from premature retirement do not spiral out of control,” chief executive Timo Kietavainen said in April. “Now there is every reason to take up the challenge brought about by the health and social services reform in earnest.”
As the largest earnings-related pension provider in Finland, Keva is responsible for the pension cover of almost the entire Finnish public sector. The pension had €3.7 billion in private equity assets as of 31 December, equivalent to an allocation of 7.1 percent of its portfolio, according to the pension’s annual report.
Some of the pension’s largest commitments are in Warburg Pincus Private Equity XI, Advent International VII and EQT VI, according to financial statements.