Annual Report 2014


Economic operating environment 

The economic year 2014 ended in a climate of increasing uncertainty 

Uncertainty in the economic operating environment grew in the second half of 2014, and the year ended in an atmosphere of increasing uncertainty. Political and economical tension in Middle East continued, and the conflict between Russia and the West cast a shadow on the economic outlook for Finland and Europe especially. The increased risks caused greater fluctuations in the markets. This uncertainty is counterbalanced by the fact that the financial crisis and globally the strictest fiscal discipline measures are over.  

Growth remained strong in both the U.S. and the U.K. Early in 2014 the favourable development of the U.S. economy stalled, which caused concern about whether it would recover and about the risks related to the change in direction of the country’s monetary policy. However, the U.S. economy resumed its upward trend, supported by the favourable development in asset values and improving labour market situation. The growth of the U.S. economy is expected to remain strong, although recovery has been moderate, especially considering how monetary policy has been used to support the economy. 

Global investment demand remains feeble, and growth in global trade volumes is slow. China and other emerging economies continue to develop, although moderately compared to recent years. The investment cycle is picking up, which is expected to increase economic activity. However, the escalating geopolitical uncertainty is also increasing economic uncertainty. So far, this has not resulted in any market disturbances that would indicate a marked weakening in confidence in the global economy. The strong downward trend in oil prices since late 2014 also contributes to the economic growth of industrial countries. 

The eurozone still has not recovered. Growth did not take off, concern over deflation increased and unemployment rates remain high in several member states. Greece is struggling to meet its obligations, but many other countries in crisis have been able to make progress in balancing their economies. Considering the eurozone as a whole, growth in overall demand has been moderate, and the structural reforms and austerity measures called for by public finances are depressing the domestic markets. Adjustment measures, however, are no longer tightening, which creates conditions for stronger growth. 

Russian economy plummeting

Russia’s economy shrank sharply. In the last quarter of the year the price of oil was falling rapidly for reasons relating to both demand and supply. In addition to the crashing oil price, the Russian economy is being strangled by Western sanctions. The country’s economy suffered from ruble rout, and the Bank of Russia had not succeeded in stabilising the situation through its actions by year-end. On one hand, the collapsing Russian economy weakens the outlook in the eurozone and especially in Finland, but on the other hand, the fall in the price of oil promotes economic growth in Finland and the rest of Europe. 

Monetary policy is key

Towards the end of the year the investment markets grew increasingly restless. The rise in share prices has continued for a long time, bolstered by monetary policy. The equity markets and the real economy seem to have diverged in Finland and elsewhere in Europe. In the U.S., market valuations also climbed to historically high levels. 

The European Central Bank resorted to exceptional monetary policy measures. By stretching the boundaries of its mandate, the ECB has been able to stop the financial crisis from escalating in the eurozone. Growth remains sluggish, though, and deflationary pressures also exist. The eurozone markets expected new, stronger measures by the ECB aimed at promoting economic growth. The U.S. central bank, the Fed, has been normalising its monetary policy as the economy recovers. The Fed repeatedly confirmed its commitment to maintaining economic growth. The central banks’ success in adapting monetary policy to changing conditions will be critical in order to ensure economic growth and the stable development of the capital markets. 

Finland’s economy in deep trouble

 In 2014, total output in Finland is estimated to have remained at the previous year’s level. Industrial output has been decreasing nearly nonstop for the past three years, and Finland has been losing market shares globally. Nearly all sectors of business and industry have been affected by the problems.

The decrease in the output of the electronics industry has a major impact on Finland’s total output and its value-added rate. The renewal of business and trade structures is slow, and the price competitiveness of Finland has weakened. This has called for a moderate pay policy, which in turn has weakened the development of purchasing power and the recovery potential of the domestic markets. Declining industrial investments combined with the decreasing supply of workforce and modest development of output undermine the economy’s growth potential also in the longer term. There is little leeway in Finland’s public finances.

Strong solvency is Varma’s strategic choice

Varma’s task is to invest pension assets profitably and securely. The financial crisis has hit pension systems and institutional investors worldwide. Strong solvency is a strategic choice for Varma. Varma strives for the best possible return on investments based on its chosen risk profile in order to secure the payment of pensions. Strong solvency and pro-active and prudent diversification of investments play a key role in a demanding market situation. In a difficult market situation, strong solvency is a major benefit for a pension investor. Competent risk management ensures the profitable and secure investment of pension assets, as sudden movements are anticipated in the markets.

 In the short-term, the goal of extending careers and companies’ financial requirements do not necessarily coincide. A number of Varma’s client companies are also experiencing difficult transformations. Varma’s strategic goal is to offer effective pension insurance services. The ability to understand customers’ needs is highlighted during major economic shifts. Varma is a strong expert in handling earnings-related pensions and a preferred specialist partner in workability management. Varma’s goal is to be the most efficient pension insurance company and to offer its customers the best client bonuses in the sector.