Finnish pension funds now stand at its highest level to date – around 200 billion euros, according to the organisation representing earnings-based pension fund companies.
"Some information is still missing, but it looks like we will reach around 200 billion euros," said Tela analyst Peter Halonen.
The return on pension fund investments is becoming increasingly important for financing pension payments, he added. He noted that the pension contributions paid in by employers and employees is not enough to pay future old age benefits.
Back in 2015, just under one billion euros representing pension funds and profits from fund investments was used to pay out old age pensions. Last year the sum was 1.2 billion euros and this year the amount is expected to rise even further.
"It’s impossible to estimate precisely how much we will use from the funds and their returns but the amount is expected to increase," Halonen commented.
The growing outlay in annual pension payments is due to an increase in Finnish citizens claiming pensions as the population continues to age. On the other hand, the number of working age people paying into the system is decreasing.
In addition to private pensions companies, Keva, the organisation responsible for managing pensions for municipal and state employees, will for the first time be forced to dig into its profits to pay out pensions.
"The situation is historic for Keva. For the first time, pensions to be paid out will be slightly larger than pensions contributions paid in. But we are well prepared for this," said Keva CEO Timo Kietäväinen.
Pension funds aim to keep up with rising retirees, fewer contributors
Tela has estimated that over the long term, or in about 20 years, profitability will have exceeded the level of the pension system’s sustainability calculations. In terms of profits, the system’s sustainability is therefore secure. However the sustainability of the system is also affected by the economic and employments situation.
"The beginning of the year went well. Equity investments in particular have performed well throughout, but so have real estate investments,"Halonen noted.
"However profits realised are no guarantee for the future, but now the markets are positive about future development," Halonen pointed out.
As major investors, pension fund companies closely follow the monetary policies of the major central banks, the European Central Bank and the US Federal Reserve, in particular, moves to scale back stimulus programmes.
"Scaling back too quickly could weaken economic growth, employment and corporate earnings," Halonen speculated.
According to Keva, profitable pension fund investments will continue to be important in the long term.
"As the number of retirees grows and the number of working people declines, we will be able to use sound investments to safeguard earnings-based pensions in the future and reduce pressure to increase earnings-related pension contributions," Kietäväinen concluded.