Pensions secure despite troubled economy
The economic year 2015 ended in a climate of turbulence. Uncertainty in the global economy is again on the rise.
The growth pace in many of Finland’s main export markets has been fairly good for a while now, but Finland’s economy is in deep trouble. Earnings-related pensions are well secured also during economic turmoil.
Outlook remains stable in the U.S. and recovery in the eurozone continues
Uncertainty nevertheless overshadows the business climate. The global economic development has been divided: recovery in the developed economies is expected to continue while the emerging economies are still struggling. The emerging markets are suffering from the falling raw material prices. Concerns over China’s development caused special uncertainty in the markets in 2015. The economy of Russia, which is a major export country for Finland, shows weak performance.
The outlook for U.S. economic growth remains stable, but the growth expectations have come down. The Fed, the central bank of the United States, finally raised its benchmark rate in December, and started the process of normalising its monetary policy. Employment rates have improved, but there is no pressure on pay levels yet. The U.S. economic cycle is running ahead of Europe’s.
Recovery in the eurozone continues. The monetary policy framework continues to prop up growth in the eurozone. Member states that took the worst beating by the economic crisis have carried out major structural reforms, the impacts of which are reflected in stronger growth. Despite improving employment rates, youth unemployment continues to be a major problem in many countries. The increasing global economic uncertainty overshadows expectations concerning strengthened economic growth in Europe.
Migration into Europe increased to unforeseen levels during the year. Initially immigration costs cause a burden on public finances, but in the long-term, immigration has a favourable effect on Europe’s “greying” age structure provided that immigrants are able to enter the labour markets.
Central bank measures at different phases of the cycle
Strong market volatility continued in 2015, and we can expect abrupt movements also during the economic year 2016. The central banks’ measures are now at different phases of the cycle. In the U.S., the Fed started to tighten its monetary policy. However, its monetary policy solutions are characterised by sensitivity to employment and growth rates due to the global economic uncertainty. The ECB is expected to continue its monetary policy stimulus measures in the eurozone. Inflation has remained clearly below the central banks’ target level.
Varma’s strategic target is to foster its strong solvency. In a volatile market situation, strong solvency is a major benefit for a pension investor. In addition to solvency, the main focus is on the active diversiﬁcation of investment assets and a careful approach to risk management. As sudden and strong movements can be expected in the markets, competent risk management promotes the profitable and secure investment of pension assets.
The environment of low real interest rates is challenging in terms of financing pensions. In Finland, the level of pension coverage is predetermined and is not directly dependent on, for example, the return on pension assets invested in funds. It was agreed in conjunction with pension reform that the equity-linked share of the return requirement on technical provisions will be gradually raised to 20% as of the beginning of 2017. This is a buffer jointly maintained by earnings-related pension companies to bear some of the risks resulting from the fluctuations in equity income. This solution will improve opportunities to target higher returns and thus supports the financing of pensions and keeping pension contributions at a reasonable level.
Finland’s economy awaits a turn for the better
Finland’s economy is still in deep trouble, although the global economy and Europe have been recovering for a while now. In 2015, economic growth in Finland is estimated to have remained at around zero. The road to economic growth has been arduous. Finland has fallen behind its competitor countries. A clear turn in the economy is hoped for in 2016, but there are no sure signs of it.
As a small open economy, Finland is strongly dependent on global trade. The export structure has become one-sided as a result of the changes in trade and industry structures. The competitiveness of Finland’s export prices is weak, as there has been little flexibility in cost levels. Society in general has a shared understanding of the nature and scale of the problems, but reaching decisions that improve cost competitiveness has proven difficult.
The decline in industrial output that has continued almost uninterrupted for several years is finally expected to end in 2016 and production volumes to marginally increase as a result of stronger export demand and the projected weakening in exchange rates. The slowing down of global economic growth would be fateful for Finland’s economic recovery.
The situation in the domestic markets is somewhat more positive. Private consumption has shown fairly steady growth in light of the weak economic development. No major boost can be expected from the domestic market as household incomes will grow very moderately over the coming years.
Investments are expected to pick up slightly. The foundation of Finland’s economic growth has been weakened by the long-standing investment slump. Although a slight turn in the economy is expected to take place, the growth rate will not be sufficient from the point of view of public finances. Improving price competitiveness requires immediate action as well as moderate pay increases in the longer term. Economic policy in the near future will be characterised by the adjustment of public finances and the ongoing change in the structures of trade and industry.
The situation in the labour market remains sombre. The rise in unemployment seemed to have halted in the second half of the year, but in December unemployment started to increase again. Structural unemployment has increased. From the perspective of financing pensions and future pension coverage, the unfavourable development of employment and increasing long-term unemployment are alarming trends.
Pension reform is implemented at Finnish workplaces
The bills on pension reform, due to take effect in 2017, were passed by parliament in autumn 2015. The purpose of the pension reform is to lengthen careers and strengthen statutory earnings-related pension cover in the coming decades. Pension reform is the most important structural change to be implemented in recent years, and it will bring about changes to both pension benefits and pension financing.
The significance of employment is highlighted in the partly fund-based pension system, as the majority of pensions that are currently being paid are financed directly through pension contributions. This makes it important to promote the achievement of the pension reform goals also in workplaces. Varma handles its task – securing pensions – as effectively as possible. We have had a careful and sustained approach to preparing for pension reform.
The goal of longer careers does not always necessarily coincide at workplaces and in people’s lives as the economy is currently suffering and structural changes are shaking the business sector. Here at Varma, the pension reform will offer us a good opportunity to deepen our client relationships as the changing rules of pension provision will increase the need for information. Varma is a strong expert in workability management and vocational rehabilitation – we support our client companies and the insured in extending working careers.