The investment environment has been very challenging, says Hanna Hiidenpalo, who is investment director for Tapiola Mutual Pensions Insurance, based in Espoo. The guaranteed rate of return Finnish investors need to receive is currently at 4.5%.
“The decision about the guarantee rate is not very closely related to the realities of the lower interest rate environment,” she points out. But that said, Tapiola, which is the third largest of the insurers in Finland with group assets of E9bn and pensions assets of around E5bn, has always produced positive returns on its pension portfolios – in 2002, it returned 5.3% and over the five years to end 2002, 6.2% annually. “Last year was once again a very good year for Tapiola Pensions,” Hiidenpalo says.
The fund has been the only pension insurance fund in the country to meet the guaranteed return requirement throughout. She has a definite view on that: “We have been fortunate – but it is not luck but hard work that has brought about this result.”
Tapiola is a mutual, servicing the pension needs of the mainly small to medium sized enterprises, but also includes big companies among it customer base. It is one of the seven pension insurance companies competing in this part of the pensions market for earnings related schemes. The insurers provide all the investment, administration and other services the sponsoring employers require.
Hiidenpalo, who has been with Tapiola for 12 years, is responsible for the investment portfolio which is 95% managed in-house. There is one asset allocation for the portfolio, which is decided by the investment committee with input at board level, she adds. “The overall asset allocation is made annually, but reviewed three or four times a year. In fact, we are tending to do it more frequently because of market conditions.”
The headline investment objective is to obtain a “good and steady” longer term return, while avoiding capital risks, through well-diversified investments. The company has an 18% solvency ratio, higher than most of its competitors, yet it has consistently produced better returns. The solvency requirements are closely tied in with the asset allocation, she says.
At the end of 2002, bonds and other debt securities and deposits came to around 75%, equities 12%, real estate 8% and loans to customers 5%. In the past decade, the biggest change in pensions portfolios has not been a shift to equities, but the move from customer loans. Ten years ago, these accounted for 70% of Tapiola’s assets and now for a small fraction. “These loans developed during the 1980s in Finland when there were very limited opportunities for investment in fixed income securities,” she says.

In 2002, these loans accounted for 5.2% of the portfolio, with the main emphasis on loans against contributions and for employers’ own properties. This is still an active market, though the demand was in line with previous years, and overall returns on loans came to 5.3%.
Around 70% of the portfolio is in fixed income, with around three quarters of this in government bonds in Euro-zone countries, the biggest components besides Finnish, being French and Dutch sovereigns. “The impact of the euro was to make us diversify more across Europe,” she says. The fixed income portfolio returned 9.5% in 2002, benefiting from the significant decline in interest rates.
Corporate bonds accounted for 11.2% of the fixed income components, and is diversified across sectors in Europe, with an average credit rating of A, but with a minimum of BBB-. High yield investments are managed externally. Though Finnish issues make up a fifth of the corporate bond holdings, it is the arrival of the euro that is driving the increased exposure due to the small domestic market, she says.
The 8% proportion of the portfolio in real estate is in direct investments, practically all in Finland. Commercial and office properties make up nearly two thirds, with residential accounting for some 22%. The 2002 return overall was a healthy 6% and last year’s returns were above those. The emphasis has been on completing projects that have been in the pipeline, but new money is being committed as well, she adds.
Equity investment is where there has been most change. “At the moment we have about 15% of the portfolio invested there,” says Hiidenpalo. But the exposure has ranged from a high of 20% at the peak before the market downturns to 10% at the low point. The overall size of the equity content is related to the solvency margin and she believes there is room to bring the levels up again.
On the equity side the fund has produced enviable returns. “Our approach is very much a stock-picking one, based on fundamental analysis. We have a very established procedure about how to value companies.”
She adds: “We really go into companies. Our approach is very focused. And what we do best is northern Europe. I think we are managing our investments closer to an absolute return portfolio.” In addition, the volatility has been much less than that of the market, she says.
Currently, there are close to 90 different shares in the portfolio, though the investment policy allows up to 100. Typically some 80% will be in European stocks, with perhaps half in Finnish companies. Here she points out that many of the domestic companies are very international in their operations, thus providing exposure to the world economy.
The good return figures from equities have been produced even in recent years. The results have always been better than the indices, she points out. Over the five years to end 2002, the direct equity investments produced an average annual return of 9.5%, while the benchmark index was down –1.0%. “In 2002, the return was –13% for our own equities compared with over –30% for the benchmark.”
About 25% of equities are managed outside Tapiola, through funds with 10 external managers. They are hired mainly for investments outside Europe and other specialist areas.
The fund has been involved with private equity since the 1980s in fact and has around 10% of total equity investment dedicated to the area. “We have long experience and have quite a good track record,” Hiidenpalo says. About half of the investments have been done directly – “we have a very good network in Finland and in the rest of the Nordic area – and the balance is invested through funds”.
Tapiola’s assets have been growing on average by about 10% each year and with such a positive inflow, she sees an increasing amount of that going to external managers, particularly into Asian and emerging markets on the equity side. “On the fixed income side we will diversify further in Europe, though overall we intend to reduce the bond exposures.”
The aim now is to have a more balanced approach. “We could bring equities up to 20%, which we think could be optimal under the Finnish system.” But when and to what extent will depend on the outlook for the markets.
Real estate is also earmarked for expansion and it could make up 15% of the portfolio, with more activity outside Finland. “There have been sufficient opportunities here, but as we are a small country, this approach will be changed over time.”
The major portfolio shifts she sees ahead favour real over nominal assets in order to achieve more balance, while diversifying over time from the Finnish base but so far it has been a good decision to have also domestic investments. “The biggest asset allocation decision was made before summer to start increasing the equity proportion.”

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