Ilmarinen’s Financial Statements 2023: Return on investments was 5.8 per cent and cost-effectiveness improved further

“2023 was a good year for Ilmarinen. To us, responsible management of pensions means that we want to continuously improve our operations and our efficiency. Already in 2022, we became the most cost-effective company in the industry, measured by the ratio of operating expenses to expense loading components. Last year, the operating expenses financed using loading income decreased further by 5.3 per cent despite inflation, while premiums written grew 4.0 per cent. The improvement in efficiency primarily benefits our customers, but it is also important for the efficiency of the entire pension system,” says Ilmarinen’s President and CEO, Jouko Pölönen.

Our improved cost-effectiveness translates directly into lower insurance contributions for our customers, as the administrative cost component included in the earnings-related pension insurance contribution became company-specific as of the start of 2023. 

“At the start of 2024, we lowered the administrative cost component for our customers by 20 per cent and will continue streamlining our operations also from now on. Since the merger with Etera at the start of 2018, Ilmarinen’s cost-effectiveness has improved significantly, as operating expenses financed using loading income have decreased by EUR 49 million, or 34 per cent, while premiums written have grown by EUR 1.7 billion, or 34 per cent. Process automation, digital services and continuous improvement of operations should be used on an even broader scale to enhance the efficiency of public service provision,” Pölönen continues. 

New mobile channel gets young people interested in their pension accrual

Digital use of pension services increased significantly thanks to active development efforts. As a new service, private customers were offered the possibility to access Ilmarinen’s online service via OP’s mobile bank to see how much pension they have accrued. The OP mobile service helps us reach young customers in particular and encourages them to take an interest in their own pension security.

Number of disability applications grew among those aged over 60

Premiums written grew 4 per cent to EUR 6.8 billion (EUR 6.6 billion in 2022). Pensions were increased by an index increment of 6.8 per cent as of the start of 2023, and Ilmarinen paid EUR 7.2 billion (6.6) in pensions to 455,000 pensioners. The majority of the pension expenditure, i.e. 84.5 per cent, consisted of old-age pensions. The average old-age pension was EUR 1,577 per month. Ilmarinen’s customers retired on old-age pension at the age of 65 on average.

EUR 497 million was paid in disability pensions in 2023. Of the persons retiring on a disability pension, 32 per cent were granted pension due to musculoskeletal diseases and 30 per cent due to mental health reasons. For many years already, depression has been the most important single diagnosis leading to disability pension. 

The number of disability applications received by Ilmarinen from those aged over 60 grew 12 per cent from the previous year. A positive pension decision was issued to 83 per cent of them. The proportion of those aged over 60 of new disability pension retirees grew due to the rise in the old-age pension age and the fact that the definition of occupational disability is currently applied to those over 60. Occupational disability means that the person is unable to carry out tasks relating to their own occupation. The definition of general disability is applied to those under 60.

Strong equity and fixed income returns, real estate write-downs weighing on returns

Ilmarinen’s return on investments was 5.8 per cent (-6.6), or EUR 3.3 billion, despite the write-downs worth EUR 1.1 billion on real estate investments. Returns grew especially thanks to equity investments, at 10.1 per cent, and fixed income and credit risk investments, at 8.4 per cent. 

Return on real estate investments was 13.5 per cent negative. The increase in return requirements resulting from rising interest rates and the structural changes brought by the pandemic in the occupancy rates of office buildings led to write-downs worth approximately EUR -1.1 billion on the fair values of real estate investments. 

“Listed equities and shares and fixed income and credit risk investments performed very well in 2023, and the positive momentum accelerated as the year neared its end. The year was difficult for Finnish equities and shares, and the weak return on the real estate portfolio in particular reduced the otherwise excellent return on investments,” says Ilmarinen’s Chief Investment Officer Mikko Mursula. 

A long-term approach is essential in investing pension assets. The objective is to achieve the highest possible return on investments in the long term. The long-term average annual return on Ilmarinen’s investments since 1997 is 5.7 per cent, which corresponds to a real return of 3.8 per cent.

“Ilmarinen’s goal is to achieve a carbon-neutral investment portfolio by 2035. We were anchor investors in four climate ETF index funds, investing a total of EUR 5,167 million in them,” Mursula says.

Solvency capital strengthened to EUR 12.2 billion (11.8), and the solvency ratio was 125.4 per cent.

Tripartite preparations for the pension reform

The Government Programme acknowledges the need to prepare amendments to earnings-related pension legislation for securing the pension system’s financial sustainability and an adequate level of benefits. The government is preparing issues related to earnings-related pension policy with key labour market organisations in tripartite negotiations by the end of January 2025. 

The preparatory work must find, based on the assessment carried out jointly by the Ministry of Finance and the Finnish Centre for Pensions, methods for the stabilisation of the pension insurance contribution level and significant reinforcing of public finances as a whole over a sustained period using a rule-based fiscal stabilisation system. The amendments must strengthen public finances in the long term by approximately 0.4 percentage points in relation to the GDP, representing some one billion euros.

Investment returns are becoming increasingly significant from the perspective of the pension system’s financial sustainability, which is why the solvency framework for earnings-related companies should be reshaped so as to enable them to seek better long-term returns.

Attachments

• Report on operations and financial statements (pdf, in Finnish)
• Attached graphs and tables (pdf, in Finnish)