The Finnish FSA said pension solvency weakened in the third quarter but is still strong, with overall returns having been bolstered by illiquid investment allocations plus the depreciation of the euro.
In its July-to-September report on the capital position of the Nordic country’s financial sector, FIN-FSA (Finanssivalvonta) said: “Employee pension institutions’ average stress resilience is still strong, despite the weakening of solvency.”
Solvency in the employee pensions sector decreased during 2022, as the return on investment was negative and was clearly lower than the return requirement, the supervisory authority said today.
At the end of September, the solvency ratio was 128.2%, compared to 136.3% at the end of December 2021, it said, and the solvency position – the ratio of solvency capital to the minimum solvency requirement – had also weakened to 1.7 from 1.9 over the same period.
Employee pension institutions’ average return on investment was minus 6.2% at the end of September, as liquid investments – listed shares, bonds and money market investments – were markedly negative, the FSA said.
“The return on illiquid investments – loans, real estate, private equity and hedge fund investments – was clearly positive,” it said, adding that it had been borne in mind that the valuation of those investments was subject to higher uncertainty.
“The depreciation of the euro in 2022 has also bolstered return on investment notably,” the authority said.
In the employee pension sector, the growth in private equity investments had increased the proportion of illiquid investments, which accounted for 45% of total investments at the end of September, said FIN-FSA.
The big picture for the financial sector in Finland was an increasingly gloomy operating environment, however, the authority said.
Weakening economic growth, high inflation and energy prices as well as rising interest rates were straining the ability of households to service their debts and consume, and were eroding business profitability, it said.
“This increases the risk of significant investment losses and loan losses and also weakens the profitability outlook for the Finnish financial sector,” it said.
In an environment of elevated risks, the FSA said, the strong risk-bearing capacity and preparedness of supervised entities was increasingly important.
Norwegian FSA warns interest-rate rise could be fleeting
In Norway, the country’s FSA (Finanstilsynet) has issued a warning in its latest risk report that even though higher interest rates have helped improve pension institutions’ solvency for now, that increase might prove short-lived.
The Oslo-based financial watchdog said it its December risk report that given their substantial investments in the financial and property markets, higher interest rates and the stock market decline had contributed to negative returns and weaker profits for pension institutions.
“On the other hand, a higher interest-rate level has helped improve solvency, as the present value of the institutions’ future liabilities has fallen more than the value of their assets,” it said.
But it warned: “However, it must be taken into account that the increase in interest rates may be short-lived and that interest rates may decline in the longer term and approach the low level observed in recent years.”
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