Monday, 3 November 2008

Making Finnish Pension Fund "Flexible"

Last week, I had a chat with a friend that was about to retire in the month to come. After a lenghty discussion, I was questioning, the impact on the financial crisis on retirement benefits.

First, let's set the background. You have to understand that the stock market has seen some Finnish stock plunged from a range of 10 to 30% in October alone, while most shares have lost around 30 - 60% of their value since the beggining of the year.

So one has to question the extend of the pension fund portfolio losses that they have endured. Second raise the issue of solvency of those institution that must guaranty a safe start of a massive amount of people that will retire in the year to come (i.e the WWII baby boomers).

So I did some search, quick one - you are welcome to share more elements....

"The €23.4bn Ilmarinen Mutual Insurance Pension Company has reported a negative return of -9.4% for the first nine months of 2008 and a loss of €2.3bn in the third quarter, but its solvency ratio could improve under Finnish government proposals to relax regulations.

It appears Ilmarinen was not alone in suffering significantly losses within the last three months as the Finnish government is now discussing a Bill to temporarily reform the solvency regulations for employment pension companies to make them more "flexible"."

Make them more flexible..."Flexible" Damn, for some reason, I don't like this word... Does that mean that the losses made during October, made them insolvent or about to be? I don't have an answer for that, but if they have to pass a law to change the rules on the fly, it clearly state of emergency.

"The Finnish government said as the market value of Finnish shares owned by pension companies have fallen sharply, the solvency rates of the firms have also come down fairly quickly, so the proposals are designed to avoid pension companies having to divest from stocks in a way that would disadvantage Finnish stock prices."

So we don't want to see the "casino" "stock market" to plunge further, since the Pension Funds will have been forced to liquidate positions in order to stay solvent within the current rules.

The combination of "Free market" and State intervention might work if we are in the position of a correction not a fundamental (technically and ideologically) readjustment. Should it be the latter, the consequence could be dire...

"The Bill, which is designed to strengthen private sector employee pension insurers' solvency, is expected to come into force as soon as possible and the law could remain in place until the end of 2010.
As a result of the recent market volatility and the poor returns, Ilmarinen saw the value of its investments fall from €25.7bn at the end of June 2008, to €23.4bn at the end of September, a drop of €2.3bn in just three months. (See earlier IPE article: Ilmarinen loses €1.7bn in H1)

Ilmarinen has revealed its solvency capital reduced from 22.3% of technical provisions at the end of June to 15.5% at the end of September, while its solvency ratio had dropped to 1.3 times the minimum requirement, compared with 1.9 times held three months earlier

"However, Jaakko Tuomikoski, deputy chief executive and president of finance and risk control at Ilmarinen, said even though the financial market crisis "worsened to unprecedented dimensions" in October, the solvency capital of the pension fund has remained above the solvency margin."

It looks like Ilmarinen (you can put Varma, the other pension Fund, in the same bag), is flirting with insolvency. Their Portfolio contain as well property, and as we all know , property price have turned and started to decline...

I do hope that The parliament, the government will have an open, transparent and heated debate in the month to come to expose the truth so that confidence, and reassurance is not lost among its citizen... At the end they are gambling money from hard working citizen, so that's the minimum they deserve...
Isn't that, after all, a transfer of wealth from workers to shareholders, as the pension fund are supporting the stock market or at least certain company share price?

Source : IPE , Varma , Ilmarinen


Rui said...

10% dropping in 8 month at current market situation is not bad at all. After all, the Finnish pension fund all has tax refund, quite a lot in fact. I think buying fund like Nordea pension is still much safer than do it yourself. Tax refund can easily cover 10% of annual loss.

Now the tax refund for housing loan interest is also quite big. More than one hundred Euro a month. For example a typical housing loan real interst. 5% OP Prime + 0.3 margin - 1.3% got from tax return. It is only 4%, and interest rates is still dropping ...

HousingFinland said...

Thanks Rui,
You give me a good opportunity to talk an area I wanted to express at some point...

I would clearly advise NOT to take any fund in general...Selling them today is too late unless you need that money in the short term (i.e within 5 years)

Not only those funds are badly managed but on top of that you pay a fee on it, sometime a quite big one...Basically you pay the fund managers a fee for the losses they made.

To be franck, either you buy stock yourself and you know what you are doing or simply put your money in safe investment i.e a currently guaranted +5% fix term account linked to Euribor before tax... I have highlighted that many months ago.

Here is a link to the Nordea Fund performance or non-performance:

Then click on each fund to see yearly to monthly performance...since about 6 month ago, they have removed the monthly performance in the main page...quite normal when you see the losses...

The strange thing is that in fixed income that was supposed to be safe, and is guaranted by nordea to be safe, you see massive losses...

* "10% dropping" of what!
Try to be logical!
10% of 100 euro this is fine.
but 10% of 10 of billions, that is a problem. No wonder the government is stepping in to change the rules and on the way the solvency target...

"...It is only 4%, and interest rates is still dropping ..."

Ask to the people of 1992->1998 or by the way of 1975-1985 (people forget the crash (-50%) of the 70's), interest rates were still falling and fast...the problem is that housing price were falling if not faster and since the leverage is big, each percent is translated into thousands of Euro of losses or more year added for the loan payment...

Today, I would advise people to:

1- Don't buy, if you are planning to do so, instead wait 3-5 years until price have settle down and the purchasing power improve..and most imprtantly have a better visibility on the impact of the current financial meltdown...

2- if you have invested in a house for rentin business, it's all fine if the yield is over 6%...

3- If you have almost paid you debt, then there is no problem. In case of crisis, it's always good to have a own shelter.

4- Do not buy a new house before selling your old house, since that will double the debt burden in a situation of a marked housing slowdown. (that's the two house trap)

5- If you have very big debt, and in a long term. And if you think today, this debt is unsustainable (Remember the economy is still doing well and interest rates are still historically low). Either you start saving in order to absorb any big incoming shockS or you can't simply afford such burden then selling now is the best option as price have just started to correct.

Important Notice: do not make any decision based on the advise given in this comment. At the end, take a decision based on your own financial situation. Seek advise from multiple source from different background. Take your time and add risk management on top of that (divorce, unemployment, family getting bigger - not on weight but new family member- not the gran mother joining the group but a new born baby has an non negligeable impact on the financial situation).

Last but not least:
Do not listen to people that says, it's stupid to rent, you are throwing money... that's a total nonsense ...At the end the people that give you this kind of advise, will not step in if you are in difficulties later on. Some even tell that because they feel better that they are not the "only one" in this be careful!

Ask the people who do not have loan and check how their quality of life is compared to the one who have a big debt burden? strangely enough when people had nothing they were happier than when they started to get those big burden...but again it depends on the people and their level of managing the stress.

Anonymous said...

It is not a question about the big house loan now taken by individuals.

Normally people buy a house for living not so much an investment.

You just do need to live somewhere, don't you.

I think it is more clever to have own house, since if you can pay back nobody can say that 'ups' the 'rent' deal is over and you have a month time to find another place to live.

If it is your own house you will take care of it more carefully and you are interested in to invest the house renovation and so.

Should we punish loan takes because of too big risk or what?

I think it is not clever or even right to take over house, ff one have had a 'good' job and he has taken a loan and now he will loose the house and the job because of international finance crise.

HousingFinland said...

"You just do need to live somewhere, don't you."

Ask that to peopla in Ireland, Spain, US, Sweden etc...

Ask that to people that lived through the 90's, 70's crisis

Ask that for people that are now worrying about the rise of price of food as they have stretched themselves...

Ask the Germans why the majority are renting instead of owning

Last, ask yourself, what's the difference to pay to your bank or your landlord? knowing that you will pay almost double to your bank for almost all your life for currently an overpriced assets.

HousingFinland said...

"I think it is not clever or even right to take over house, ff one have had a 'good' job and he has taken a loan and now he will loose the house and the job because of international finance crise."

In the past, they were asking 30% down payment, and check very carefully the amount of loan they were giving and the debt burden.

Today, because bankers need to get big bonuses and bring record profit, they had to increase the volume of loan given as well as the amount and put aside risk management...

So the Problem is not the genuine buyer, the issue is with the fraudulent behavior of many bankers... Why during 90's, bankers were not put to jail as well as the central banker at the time? at the end they profited of the situation on the back on honest workers.

Today you see the same situation in the US, still they have enjoyed millions of dollars of salary and are still enjoying massive bonuses (even some extracted from the recent bail out package).

But let's be clear, we need bank to have a functioning market economy. What I condemn is the risk and the extend banks have provided credit in an uncontrolled way, and in the way inflated lots assets (stocks, housing)...

Rui said...

I think if you have bought apart before 2005, then you are ok. It is very unlikely you will lose money.

For example, at the place I live Aurinkolahti. New apartment 80 m2, at 2004 price is only 200K. If you took 100% loan, in worse interest rates 6%, you only lose 1000 Euro as interest / month. Consider tax benefits, you lose only 900 Euro as interest / month.

That is no more than rent. Similar apartment today, rent is easily 1200 Euro / month.

I personally feel, recession will be over in one year. At 2010, everything normal. High inflation, government printing money, it will dialute all the bad loans. It also make housing loan easy to pay.

You can not use history to explain today. Today the economic circle is much faster, I think there will be some kind of recession, but it can not be a long one, long means 5 to 10 year.

So just try to hold on the job for next few years, things will be ok.

Eric said...

"For example, at the place I live Aurinkolahti. New apartment 80 m2, at 2004 price is only 200K. If you took 100% loan, in worse interest rates 6%, you only lose 1000 Euro as interest / month. Consider tax benefits, you lose only 900 Euro as interest / month.

That is no more than rent. Similar apartment today, rent is easily 1200 Euro / month."

Missing one thing Rui. If you own a place you normally have building maintenance fees of €200 to €250 which you landlord eats if you rent. 1200-200=1000 a month and you have no equity risk (currently only downside risk) in the apartment. Is that equity insurance worth €50 to €100 if you have, say €50,000 or €100,000 of your own cash in the apartment? Some people might say yes.

Rui said...

Maintenance fees is less than 200, 189 for me include a warm garge. It is really nice to have a warm garge. All the building in Aurinkolahti has warm garge under ground. In winter, I never need to scratch ice off car window, never need external heater for car.

I think the housing price will drop to 2004 level very soon, but not lower than that. Because of high rent.

The rent for 49 m2 apartment in Aurinkolahti is 930 Euro. I have a friend own 4 such apartment next to my door. All rented out. The rent barely coverd her interest cost. She bought it last year, it was too expensive, each one cost 189K Euro. That is too much.

Basically reasonable housing price should be something like 180 * rents.

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