FINLAND - The Local Government Pensions Institution (Keva) reported a negative net investment return of 20.6% in 2008, as the value of its assets fell to €20bn.

Preliminary figures published ahead of the annual report in May 2009 showed only fixed-income and real estate investment produced positive returns as the value of the pension fund fell from €24.3bn to €20bn in 2008, a drop of 17.9%.

The figures showed fixed-income produced the highest return of 2.7%, and real estate yielded the only other positive result of 0.7%, while the equity holdings returned -41.9%, and hedge funds yielded -17.1%, albeit private equity also performed poorly with a return of -15.5%, and commodities added -3.4%.

Timo Viherkenttä, deputy chief executive of Keva, said: “The decline in the value of assets in 2007 set off a downward spiral, which has continued despite the extraordinary measures taken by governments and central banks. Beginning in the autumn of 2008, investment markets have also been weighed down by a rapidly deteriorating outlook for the real economy. We still don’t see any clear indications of sustainable market recovery.”

At the end of the year “just over one-fifth of all investments were made in Finland”, and the overall asset allocation of the scheme, which is responsible for the earnings-related pension for local government employees, included 48.7% in fixed income - an increase from 39.8% in 2007 - while equity investments fell from 47.9% to 36.6%.

Meanwhile, the allocation to real estate increased to 10.6%, up from 8%, and while private equity and hedge fund investments remained constant at 3.4% and 0.7% respectively, the 0.2% allocation to commodities was reduced to 0% by the end of 2008.

Markku Kauppinen, chief executive of Keva, claimed 2008 was “bipartite” as the investment returns were negative but the development of the pensions operations was “strengthened” with an “excellent result” as contribution income increased 5.8% to €3.9bn.

Kauppinen said: “The crisis on the financial markets had a significant impact on equity investments, which dragged the overall portfolio return into the red. We may be facing a fairly long period of lower than expected growth, which means that we will have to exercise caution in predicting investment returns. In the near future, we won’t be seeing the kind of returns we used to enjoy.”

That said, the organisation reported it achieved a cumulative real return of 2% a year between 1988 and 2008, and Kauppinen suggested the drop in market values will offer “good opportunities to Finnish pension insurers, which are solvent and debt-free, when the expected return on investments and, in particular, equity investments eventually improves”.

“Despite the poor performance in investments, the financial foundation of the municipal pension system is sound. Contribution income increased by approximately 6% and, according to long-term financial forecasts, stabilising the contribution of municipal employers at current levels is still possible,” added Kauppinen.

Figures showed in 2008 the institution paid out around €2.8bn in pension benefits, a 7.1% increase on the previous year, as over 13,000 members retired to bring the total number of pensioners receiving benefits from Keva to 321,876, while the number of people insured reached 495,000.

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