INVESTMENT RETURNS DEPRESSED BY DECLINE IN SHARE PRICES
In January–March, Ilmarinen’s investment portfolio generated a return of -1.4 per cent (7.1 per cent on 31 March 2015). The long-term real return remained at a good level, at 4.1 per cent. At the end of March, the market value of investments stood at EUR 35.8 (37.0) billion.
"The investment year 2016 kicked off in a nervous mood, with volatile share prices and interest rates returning to a record-low level. The decline of European stock markets in particular affected Ilmarinen's investment returns in the first months of the year," says President and CEO Timo Ritakallio.
Investments in listed equities produced a return of -5.5 (17.7) per cent, fixed income investments -0.5 (1.2) per cent, and direct real estate investments 0.7 (1.4) per cent.
"During the first quarter, investors continued to be concerned about the slowdown of China's and the entire world's economic growth and the development of raw material prices. Concerns about Europe's structural challenges, such as the Brexit debate gaining momentum, weighed on the markets," Ritakallio explains and adds:
"Of the main equity markets, the US and emerging economies reached positive figures at the end of the quarter, while Europe and Japan remained clearly in negative territory. The geographical distribution of equities and shares thus had an exceptionally large impact on investment returns in the early part of the year."
Ritakallio points out that a single fairly weak quarter will not threaten pension assets.
"A pension investor's returns should be looked at over a long-term horizon. The returns generated by the pension system can be calculated in a comparable manner for a period of close to 20 years, two decades marked with both economic upturns and financial market crises," Ritakallio says.
Ilmarinen's long-term investment returns remained on a good level. The company's real return on investments since 1997 is 4.1 per cent per year. The Finnish Centre for Pensions uses a 3.5 per cent expected real return rate to estimate the future development of earnings-related pension insurance contributions.
Ilmarinen's solvency also remained strong. At the end of March, the company's solvency capital was EUR 7.5 (9.7) billion, which is 26.6 (35.8) per cent of the technical provisions and 2.1 (2.6) times the solvency limit.
"Strong solvency protects pension assets from market volatility in challenging times and helps the pension insurance company to bear investment risk," Ritakallio says.
A dynamic start to the year for Ilmarinen
Ritakallio is pleased with Ilmarinen's activities in the early part of the year.
"In terms of customer acquisition, the year is off to a good start, we have managed to keep our operating expenses in check and Ilmarinen's operations have been renewed in many ways," Ritakallio says.
Ilmarinen has launched a number of development projects stemming from the company's strategy.
"Our operating model called Wauhdittamo aims to engage our personnel and our customers in the development of digital services. At present, every tenth Ilmarinen employee and a team of students are working at Wauhdittamo on selected development projects using agile methods. Our customers will benefit from the first concrete results already in the course of this spring," Ritakallio says.
In February, the Financial Supervisory Authority issued new guidelines on earnings-related pension companies' well-being at work activities and the financing thereof.
"Ilmarinen is strongly committed to the new operating model and we are in a good position to operate in accordance with the new regulations. For a long time now we have been systematically following up on the effectiveness of well-being at work projects. We also have concrete proof that improving the quality of working life can help reduce disability risk," Ritakallio says.
"Market volatility to continue during the rest of the year"
Ilmarinen's CIO Mikko Mursula believes the strong market volatility will continue also during the rest of the year.
"Concerns about the global economic growth rate and companies' earnings power in times of low economic growth will be reflected in strong share price volatility going forward. Additionally, for example, any forecasts of the impacts of record-low, even negative interest rates on the financial sector, corporate investments and investor behaviour are only guesswork – this is the first time ever that we are witnessing a situation like this," Mursula says.
According to him, at least one thing is certain: the low interest rate level will continue to guide investors to seek alternatives to fixed income investments.
"As a result, going forward, investors' interest will be focussed on different real asset classes, such as real estate and infrastructure," he anticipates.
In line with its investment strategy, Ilmarinen will continue to diversify its real estate portfolio outside of Finland while also carrying out major construction projects in its home country.
"We are developing a thousand rental flats in the Helsinki area, surrounding municipalities and Tampere. The investment is enabled by temporary legislation that permits the use of leverage also in new rental flat buildings fully owned by a pension insurance company," Mursula explains.
Ilmarinen has collected good investment returns after the financial crisis, as a result of which the company's solvency and risk tolerance are at a good level.
"Our broadly diversified investment portfolio has been built to perform even in the most challenging circumstances. That is necessary as it is highly possible that the low investment return environment is here for the foreseeable future," Mursula says.
For more information, please contact:
Timo Ritakallio, President and CEO, tel. +358 10 284 3838, +358 500 536 346
Mikko Mursula, CIO, tel. +358 10 28 43840, +358 50 380 3016
Päivi Sihvola, Senior Vice President, Corporate Communications, Marketing and Human Resources, tel. +358 10 284 3590, +358 40 757 4992