Too much money?

It is rarely that too much money is the concern when talking about central government finances. Also in the case of the National Pensions Fund, the actual problem is not a large amount of money, but how the development of the fund will influence the operation of the fund.

It may be that this issue was not investigated to a sufficient extent when the Act on the National Pensions Fund was prescribed. The easiest way to deal with decisions was to postpone them to the future – which is probably a fairly common approach to life.

In 1990 the Finnish Government started to save money for future pension expenditure. That is when the National Pensions Fund was established. As the assets of the fund increased, a decision on a suitable level of assets, i.e. how much money should be tied to the fund, had to be made. This target level was increased little by little, and the current target level was set in 2006 when the Act on the National Pensions Fund was reformed. At that time, it was prescribed that the assets of the fund would be increased until they amounted to 25% of the Government pension liability. However, no regulation on what should be done once this target level had been achieved was never prescribed. The Act only states that a decision on the next move must be made once the target level has been reached.

Naturally, the target level seemed to be far away when the Act was being prescribed. Time passes, however, and the pension fund has now succeeded in increasing the saved pension assets. At present, the assets of the fund amount to EUR 20 billion. The target level of 25% prescribed by law is only a couple of percentage units away. The general economic situation also influences the development of the fund, and it is possible that the target level will be reached within a couple of years. It is a good thing that the target level will be reached, so what is the problem?

In the case of funds, profit and risks are linked. When the target level is so near, taking investment risks is no longer wise; instead, we should prepare for retention of the achieved target size. A reduction of risks means a decrease in the expected profit, however. This is not a good thing from the viewpoint of the management of state-owned assets. The large asset base of the fund, more than EUR 20 billion, should also make profit in the future as it has made so far. The Government considers itself an eternal investor, which is why the selected target size of the pension fund should not influence the investment strategy.

The decision-making on the pension fund was postponed for understandable reasons. The target level is so close now, however, that we should address the issue. This is an extremely important issue that is connected to a host of major questions, one of which is how much we should save for future pensions. Is the fund level of 25% appropriate? On the other hand, we must decide what we will do once we have reached the target level. Surely there are plenty of options. Should we stop saving in the fund? Should we increase the transfer from the fund to the budget, which is currently at 40% of the pensions paid?

The assets of the National Pensions Fund have been successfully increased. This has given rise to new questions that should be resolved in good time. Such decisions can only be made with proper discretion, and different actors must be taken into account. The decision should not be rushed. That is why we should start acting soon.

The National Audit Office recently published an audit on the capital management in state funds. The audit covers the National Pensions Fund, the Development Fund of Agriculture and Forestry, and the National Housing Fund. More information on the audit: Capital management in state funds.