Finnish pension centre highlights private equity costs in new report
Helsinki-headquartered pension body Eläketurvakeskus has published a report on pension fund costs (Tapio Haaja/Unsplash)
Good morning. I recently had a chat with the Finnish Centre for Pensions (or Eläketurvakeskus but for my sake I will refer to it as ETK from now on) about a report it published into pension fund costs.
The report examines the investment expenses of pensions in Sweden, Norway, Canada, the Netherlands and Denmark between 2020 and 2024. It also looks into the returns these pensions provided and their investment strategies.
Why has ETK, a government body which oversees the pension system, done this? Because, as Mika Vidlund of ETK explains to me, Finland is currently going through a reform process and “we are trying to learn from others”.
The headline finding, I suppose, is that costs sit somewhere between 0.1 and 1 per cent and that this is generally affected by the pension’s investment strategy.
For example, exposure to private equity is a costly exercise.
This much can be seen here (all data from here on in relates to 2024, the most recent year ETK got the data for):
This is a matter that may be pertinent to pension funds in parts of the world where the government is encouraging greater exposure to private equity such as, for example, the UK.
But look, private equity is expensive. It costs money to go out there and run the rule over companies which are not listed on the stock exchange and may be at a very early stage in their life.
The hope is that all this work will deliver returns but this is where it gets a bit more awkward:
The trendline is actually…downwards. As private equity exposure goes up, returns go down.
The obvious caveat here is that this is one year’s data but as we have covered before, it confirms simply investing in private equity is no longer an automatic winning strategy.
Competition is hotting up as more institutional investors - and increasingly retail investors - flood into this sector.
But it’s worth saying that the pension funds in question do not necessarily see a problem here.
Antti Mielonen, who worked on the ETK report, says: “I think almost all of these pension investors here in our study will say that there is some utility in investing in private equity, and they should invest as they are investing - even though they incur costs.”
He says there is evidence pension funds have been able to make “some extra money” through their private equity investments and suggests the approach taken - for example managing investments externally or internally - may dictate some of the outcomes.
Mielonen says: “It may be rational to incur some costs by having your private equity exposure managed externally and spread the risk. The costs may protect you on the downside.”
