Varma - Annual Report 2012

A strong earnings-related pension system creates stability

Earnings-related pensions and the assets that are funded for them are well secured in the Finnish defined benefit pension scheme. A strong earnings-related pension system bolsters confidence during an economic crisis.

The economic year 2012 ended in an uncertain atmosphere. Although the crisis that has weighing on Europe eased up towards the end of the year, the underlying problems have not been resolved. During the year, several assistance solutions were devised to help the countries in crisis, and efforts were made to renew the institutions that govern the economic structures.

Owing to the notable monetary policies implemented by the European Central Bank and other central banks, the situation in the financial market eased. Despite the uncertainties, 2012 was reasonably good in terms of investments. The central banks' measures have bought time for structural measures in the member countries. The financial markets may still react strongly should single economic risks be realised. In order to abate and solve the structural problems in the banking sector, the EU agreed on measures aimed at creating a new eurozone banking union.

The slowdown in global economic growth also affected export-dependent emerging countries, which are the very drivers of global economic growth. China's new leaders, which took office at the end of year, are expected to take actions to revive the country's economy. Following the presidential election in the U.S., minor progress was made concerning the problems in public finances, although no actual solution was reached. During the year, somewhat feeble economic recovery continued in the U.S., and the indicators for future direction were contrasted.

Towards the end of the year, the credit flow to certain troubled countries improved. The outlook for German industry also looked somewhat brighter later in the year. However, investments continue to flow to safe havens. The scope for recovery has been exhausted in most countries, and public finances will have to be tightened even in strong EU countries. Towards the end of the year, it became increasingly clear that new debt arrangements would have to be made in the eurozone countries in crisis. New debt arrangements will upset the markets, especially if the most heavily indebted countries become subject to the new arrangements.

Varma emphasises strong solvency

Despite the uncertainties, 2012 was reasonably good in terms of investments, as the crisis was prevented from intensifying further. The uncertainty is expected to continue. Varma focussed on successful investment activities in a challenging market environment, and stresses strong solvency, pro-active investment risk management, and continuous improvement of the company's operations.

The Finnish financial system continues to stand on a solid foundation. Stricter regulations present profitability-related challenges in the banking sector, which could restrict lending and raise borrowing costs.


The Finnish economy calls for structural measures

The Finnish economic growth came to a halt in 2012. The diminishing growth in the global economy strongly affected export volumes. Consumer confidence weakened, but demand in Finland remained reasonable. Unemployment, however, did not increase as much as the slowdown in economic growth would have suggested, due to the changing age structure of the population and the downward trend in the growth of available workforce.

The opportunities and threats facing the Finnish economy relate to its dependency on exports. Strong export competitiveness is essential to the growth of Finland's small and open national economy and crucial in terms of the possibility to finance national welfare on the whole. As business and trade structures shift, Finland needs new competitive advantages. Strengthening the dynamics of growth requires special attention, since the competitiveness of Finland's exports has weakened.

The structural challenges for the Finnish economy are the sharp growth in public spending caused by the ageing of the population, the dwindling workforce, and especially the declining industrial activity in our country. The prevailing financial crisis is speeding up the economic structural changes in a manner that is difficult to control. The muted growth in demand for exports and fading investments, together with the reduced availability of workforce are chipping away at potential economic growth.

Improving productivity in an increasingly services-based economy, especially in the area of public services, is markedly more difficult than in industrial operations. As business and trade structures change and development in new, highly productive sectors is slow, the financing of the benefits and services of a welfare state becomes increasingly challenging.

In addition to managing the eurozone crisis, the focus must be on building a policy of growth in Finland. Balancing the economy in the long term will require structural changes. The change in the population age structure will gain momentum and the age dependency ratio will weaken. The significance of the earnings-related pension system is highlighted in closing the sustainability gap in public finances, since earnings-related pension assets are considered a part of the national economic accounts and pension legislation is reflected in the supply of workforce.

The financing of pensions will be sustainable for future generations

The Finnish private-sector earnings-related pension system is on a sustainable foundation. The sustainability of pension schemes can be estimated using several indicators. The issue ultimately boils down to social and economic sustainability, i.e. how well pensions will fulfil their role in securing the standard of living in Finland, and how strong the foundation for financing the pension commitments is. The third dimension is made up of the administrative effectiveness of the pension system. A strong earnings-related pension scheme creates stability for the economy and for society.

Responsibility for pensions extends long into the future. A sustainable pension system must be based on longer careers, general confidence in the pension scheme, fair division of resources between generations, and improving well-being at work. Remaining in working life longer and the funding of pensions will help the Finnish economy endure the change in the age structure.

Economic uncertainty continues

The euro crisis has entered a subdued phase, and the actual structural problems are yet to be resolved. We expect the uncertainty in the financial markets to continue in 2013.

The outlook for the Finnish economy looks bleak, and the economic problems are also affecting Varma's client companies. The goal of extending careers and companies' financial requirements do not always match. As the population ages, the supply of workforce diminishes. In addition to investment income, the level of employment and available workforce are vital for financing pensions.

Varma is a strong expert in handling earnings-related pensions and a preferred specialist partner in work capacity management. The ability to understand customers' needs becomes heightened in difficult periods. Varma's efficient pension insurance services have positive economic effects.