LocalTapiola Mutual Pension Insurance Company

Transcription

1 LocalTapiola Mutual Pension Insurance Company Close to you throughout your life Annual Report 2013

2 LocalTapiola Pension In 2013, LocalTapiola Pension was Finland's third largest earningsrelated pension insurer with investment capital of over EUR 10 billion. LocalTapiola Pension employed more than 200 professionals in statutory pension provision, investments and well-being at work. Table of Contents Review by the Managing Director 2 Report of the Board of Directors 1 January 31 December Finacial Statement 13 Notes to the financial statements 13 Accounting principles 13 General risk management 16 Calculation of key figures 21 Notes to the financial statement of the Elo Mutual Pension Insurance Company, parent company 23 Notes to the financial statement of the Elo Mutual Pension Insurance Company, group 50 Proposal for disrtibution of profit 76 Signatures to the financial statements and the report of the Board of Directors 76 Auditor s notes 77 Auditor s report 78 LocalTapiola in brief LocalTapiola Group is a mutual group of companies owned by its customers. It serves private customers, farmers, entrepreneurs, corporate customers and organisations. We offer non-life and life insurance services as well as investment and saving services. We also provide pension insurance and banking services.

3 Elo was born On 1 January 2014, LocalTapiola Pension and Pension Fennia merged to form Elo Mutual Pension Insurance Company. Elo insures about 490,000 employees and self-employed people. There are approximately 210,000 pension recipients. Elo employs about 450 professionals specialising in earnings-related pension insurance. Services for individuals Guidance on pensions and rehabilitation, as well as preliminary estimates of the amount of earnings-related pension Granting and paying pensions Electronic pension service Pension records Services for corporate customers Statutory earnings-related pension insurance for employees and self-employed people Development services focusing on well-being at work Preventing people from becoming unable to work Corporate financing 1

4 ANNUAL REPORT 2013 LOCALTAPIOLA MUTUAL PENSION INSURANCE COMPANY 2013 was a memorable year We began January 2013 by planning a merger. The Boards of Directors of LocalTapiola Pension and Pension Fennia had in December 2012 approved a letter of intent to merge the companies. The aim of the merger plan was to improve the overall efficiency of the management of statutory earnings-related pension provision by establishing a strong new company to provide its customers with the best service in the industry at a competitive price. Satu Huber, Chief Executive Officer D uring the spring of 2013, the costs of the planned merger were analysed and information systems were mapped to form a basis for the Boards of Directors of the companies to approve the framework agreement and merger plan. The extraordinary general meetings of the companies and the Financial Supervisory Authority approved the merger in June. The new company s name Elo was chosen as the result of a competition among personnel. In Finnish, the new name refers to our responsibility towards people and businesses throughout their lives. We strive to be an earnings-related pension company that meets the needs of individuals and businesses. During the summer and autumn, preparations were made in several projects to launch Elo Mutual Pension Insurance Company at the beginning of In the latter part of the year, we all moved to Revontulentie, Tapiola, into shared premises. The new company was launched on 1 January 2014 without any interruptions in the service provided to our customers. The seamless transfer to Elo required a lot of planning, hard work and flexibility from our employees. We can all be happy with the result. Providing our customers with high-quality service was also our main objective during merger preparations. In cooperation with LocalTapiola Group, we succeeded in increasing our customer base in LocalTapiola Pension's success in the transfer business between pension Good service; For example, pension applications are processed more quickly than average for the sector. companies was based on systematic efforts and on seeking solutions for customers' overall needs. The company achieved a clearly positive transfer business result in the sales of TyEL (Employees Pensions Act) policies. The increase in the number of YEL (Self-Employed Persons Pensions Act) policies was also due to positive transfer business. LocalTapiola Pension s success continued in the new sales of insurance policies to start-up companies and entrepreneurs. During the last few years, LocalTapiola Pension has developed its operations by listening carefully to its customers. We have succeeded in speeding up our service and improving customer satisfaction through goal-oriented development of practices and provision of new electronic services. For example, we have significantly increased the speed at which we process pension applications over the last five years. Our service speed has increased to well over the average for the sector and, at the same time, we have successfully reduced the number of personnel in a controlled way. 2

5 In 2013, we introduced several new services requested by our customers. These services included electronic applications for old-age pensions, an SMS service indicating the processing status of pension applications and a call-back system to reduce congestion in the telephone service. The implementation of the new policy management system in autumn 2013 was a major step forward. For our customers, this new system means faster service and less paper mail. The same system will later be implemented throughout Elo was a successful year for LocalTapiola Pension in terms of investments. At the end of 2013, the fair value of investments rose to EUR 10,443.1 million. The returns were particularly high in the equity markets. These returns were spurred by the economic recovery taking place in the US, as well as the gradual return of investor confidence toward the eurozone. The company s solvency remained strong. As observed in recent years, LocalTapiola Pension continued to be an active player in domestic private equity investments. An example of this was its participation in the acquisition of Fortum s electricity transmission networks in Finland in December This acquisition was the third largest in Finland s history. As of 2014, Elo will continue LocalTapiola Pension's work as the provider of the best possible earnings-related pension services to its customers. We are working in close cooperation with LocalTapiola, Fennia and Turva. Through our extensive network of partners we can provide local services to customers anywhere in Finland. Key figures LocalTapiola Pension key figures Turnover, EUR m 2, , ,735.8 Premium income, EUR m 1, , ,490.5 Net return on investment at fair value Total result, EUR m Solvency margin, % of technical provisions Solvency margin in relation to solvency limit Bonuses and rebates, EUR m LocalTapiola Pension's transfers to customer bonuses and rebates, EUR million Objectives for 2014 The cornerstones of our business are cost efficiency and providing high-quality pension services to customers. In 2014, we will continue to develop the operating models for the new company to reach the objectives set out in the company's strategy. Service We will maintain the high level of service that our customers have praised us for. We participate in developing the pension system in conjunction with labour market organisations, political decision-makers and the authorities. We invest in making services easy to use, in developing services related to well-being at work and in corporate financing. Cooperation We are working in close cooperation with LocalTapiola, Fennia and Turva. 3

6 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company Report of the Board of Directors 2013 of Elo Mutual Pension Insurance Company (previously LocalTapiola Mutual Pension Insurance Company) This is the Report of the Board of Directors 2013 of the company that has been operating under the name of Elo Mutual Pension Insurance Company since 1 January In 2013, the name of the company was LocalTapiola Mutual Pension Insurance Company, aka LocalTapiola Pension. In this report, the company is referred to as LocalTapiola Pension DOMINATED BY MERGER PREPARATIONS Among the key events during the 2013 reporting period were the preparations for the merger of LocalTapiola Pension and Pension Fennia. In December 2012, the Boards of Directors of LocalTapiola Pension and Pension Fennia approved a letter of intent to merge the companies. This was a major structural change for the pension scheme, and it was seen to benefit customers, the companies and the implementation of earnings-related pension provision. In spring 2013, the planning of the merger continued. Furthermore, costs were analysed and information systems were mapped to form a basis for the Boards of Directors of both companies for their approval of the merger plan at the end of March. The Extraordinary General Meetings of the companies approved the merger plan on 19 June The Financial Supervisory Authority gave its approval for the merger at the end of June. Preliminary work was carried out in the first half of 2013, and the preparations continued in the autumn in order to make the new company, Elo, operational. To this end, it was of paramount importance to merge specific basic functions right from the beginning of These key objectives were fully achieved, and Elo Mutual Pension Insurance Company was able to launch operations on 1 January 2014 as planned. The merger did not require any actions on the part of the customers. LocalTapiola Pension s policyholders, insured and pensioners received service from LocalTapiola as usual until Elo s first day of operation. According to estimates made in spring 2013, the synergy benefits of the merger will be significant after a transitional stage. The 2012 financial statements show that the merging companies are the most cost-efficient in the industry, meaning that, in addition to active and comprehensive service, customers will gain additional benefits. OPERATING ENVIRONMENT Financial operating environment In 2013, the world economy was characterised by two major turning points. The first was related to the strengthening of global growth prospects. The exceptionally long recession in the eurozone ended in the second quarter of the year and the acute economic crisis began to subside, even in the most problematic countries. Thanks to Europe s recovery, a global recovery was no longer entirely dependent on US economic growth. On the other hand, the economic outlook in emerging economies remained highly uncertain and began to stabilise only at the very end of the year. In addition, the impact of the global economic recovery on the development of Finland s overall production was less marked than expected, and there was no substantial improvement in the economic outlook during The other major turning point was expected to occur in central banks monetary policy. In the spring, the US Federal Reserve said they might have to cut down on recovery measures for the monetary economy. The Fed s new policy also had a major impact on financial markets as the liquidity offered by central banks had significantly supported increases in asset values. During the summer, interest rates rose and risk premiums widened. The emerging economies fixed income investment markets, which had perhaps benefited the most from abundant liquidity over the previous years, were hardest hit by the repricing of risks. The equity markets recovered quite rapidly from the decrease of share prices in June as macroeconomic indicators encouraged risk-taking in the financial markets. The increase in risky assets accelerated in the autumn, when the Fed surprised the markets by announcing that, for the time being, it will not cut back on quantitative stimulus measures. Long-term interest rates in the US and Germany decreased clearly from the summer s peak levels. Not even the US federal budget dispute and government shutdown at the beginning of October were able to cause major disruptions in the markets. The impact of the global economic recovery on the development of Finland s GDP has been less marked than expected, and there was no substantial improvement in 4

7 the economic outlook during The recession ended in the second quarter of 2013, but subsequent growth has been extremely slow. One of the greatest challenges for the Finnish economy is the sharp drop in industrial output since the financial crisis. Industrial output has fallen to the level of 10 years ago and is nearly 20 per cent below the latest peak. The dramatic structural change of the industry has severely weakened the entire national economy s productivity. Unemployment rose only moderately in 2013, despite efforts made to improve productivity and competitiveness. Meanwhile, inflation slowed much more than expected across Europe. The sluggish economic recovery, high unemployment and moderate pay increases will continue to keep inflation pressures at bay. Earnings-related pension scheme A legislative change related to the solvency reform took effect at the beginning of Under the new Act, the equalisation provision previously reserved for risk premium fluctuations and the solvency margin acting as a buffer against fluctuations in financial markets and illustrating true solvency were combined into the so-called solvency capital. Over the course of 2013, the solvency reform was continued under the direction of the Ministry of Social Affairs and Health, with the objective of revising the capital adequacy requirements for pension insurance companies. The work is expected to be completed in An investigation into competition between pension insurance companies continued after a short break, led by the Ministry of Social Affairs and Health. The matters examined include issues related to the pricing of the expense loading, customer bonuses and wellness at work services, which affect competition. A study carried out under the direction of Jukka Pekkarinen, Director General at the Ministry of Finance, for the extensive reform of the earnings-related pension scheme in 2017 was completed in the autumn of It is a comprehensive description of the status quo and the effects of various measures on the challenges related to the pension scheme and its financing. The report provided a thorough evaluation of the sustainability of the privatesector pension scheme, both from an economic and social perspective. According to the working group s report, the private-sector pension scheme accounts for approximately 0.5 percentage points of the sustainability gap of the public economy. One of the key objectives of the pension reform is to find ways to extend working lives and to reinforce the sustainability of the financing of the pension scheme. The views of foreign experts Nicholas Barr and Keith Ambachtsheer regarding the state of the Finnish pension system were published in early Both concluded that the status of the system is good. INSURANCE AND PENSION SERVICES Insurance services At the end of 2013, LocalTapiola Pension had 26,265 (25,314) TyEL (Employees Pensions Act) policies, representing growth of 3.8 per cent year-on-year. The number of TyEL-insured persons rose by 3.4 per cent. At the end of the year, there were 217,775 (210,572) people insured under TyEL. The number of YEL (Self-Employed Persons Pensions Act) policies increased by around 1.9 per cent and stood at 51,953 (50,997) policies at the end of the year. The increase in the number of YEL policies was affected by a positive transfer business, resulting from LocalTapiola s successful sales activities. The transfer business result in the sales of TyEL policies was also clearly positive. LocalTapiola Pension s success in the transfer business between pension companies was based on systematic efforts and on seeking solutions for customers overall needs. Sales cooperation with LocalTapiola Group was actively developed during the year. LocalTapiola Pension s success continued in the new sales of insurance policies to start-up companies and entrepreneurs. The market share of LocalTapiola Pension as the TyEL insurer of new companies was higher than the market share of the overall insurance portfolio. The market share of new sales of TyEL policies was 27 per cent measured by the number of policies and 18 per cent measured by premiums written. A positive trend continued in the sales of YEL policies. The market share of YEL policies was 27 per cent measured by the number of policies and 26 per cent measured by premiums written. By the end of 2013, the payroll of LocalTapiola Pension s customers is estimated to have grown by 2.1 per cent to EUR 6,054.2 million (EUR 5,932.2 million). Premiums written under TyEL increased by 2.4 per cent, amounting to EUR 1,379.5 million (EUR 1,346.8 million). Premiums written under YEL grew by 3.9 per cent to EUR million (EUR million). LocalTapiola Pension s electronic services have been intensely developed in recent years, and the popularity of electronic service channels has increased substantially. This has accelerated insurance granting and management processes and has improved the quality of customer service. The use of electronic services has also had a positive impact on customer satisfaction. When customers provide accurate and sufficient information online at one go, they receive the service they need more quickly. Over 90 per cent of the applications for new TyEL and YEL policies were received electronically. As many as 57 per cent (51%) of TyEL customers have online service agreements. The number of self-employed customers with online service agreements has also risen, standing at 36 per cent (31%). In autumn 2013, LocalTapiola Pension introduced a new policy management system. For customers, the new system means faster service and less paper mail. Customers using the LocalTapiola online service now receive fewer paper letters related to policy management, as these have been replaced by messages and online service. The customer is informed via when a new message has arrived in the online service regarding the bringing into force of a new policy or the completion of the annual statement, for example. The reform has been mostly well received by customers. The feedback and wishes for improvement provided will be used to further develop the system. The development of the policy management processes and the investments made in the quality of customer 5

8 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company service resulted in faster service and improved customer satisfaction. Annual statements sent to customers were completed faster than in previous years. This positive trend was contributed to by an increase in the share of electronic earnings notifications to 97 per cent (94%). Particularly those customers who submitted their annual notifications electronically received their annual statements faster than before. The rise in the number of electronic notifications was affected by the elimination of paper notification forms. The number of online service agreements also rose correspondingly. More than 80 per cent (89%) of all customers, regardless of how they submitted their annual notifications, received their annual statements by the end of February. Compared to the previous year, the completion rate was affected by the lower enthusiasm of customers for submitting annual notifications, which in turn was caused by the discontinuation of paper forms. By the end of February, 86 per cent (more than 90%) of customers had submitted their annual notifications. An electronic form for requesting correction of pension record data was introduced in June, in response to customers wishes. The electronic form is easier to use for customers than the paper version and enables faster correction of the insured s data. A call-back system was launched to prevent the telephone service from being overloaded. Customers have given positive feedback on this new service. It is possible to compare the efficiency of policy management processes in relation to other pension insurance companies in terms of clarifications of employment. The processing time for such clarifications in LocalTapiola Pension 5 months was much faster than the industry average of 13 months. Pension services During the reporting period, preparations were made for the forthcoming merger of LocalTapiola Pension and Pension Fennia. The key objective of the year was to maintain the high quality and smoothness of the pension decision and pension payment processes during the merger as well. The service level of LocalTapiola Pension s claims handling and customer satisfaction remained high in In a customer satisfaction survey, special praise was given for the rapid granting of pension decisions and delivery of preliminary advice, attitude towards service and professional skills. More than 80 per cent of respondents gave an excellent rating for pension services. The objective of the telephone service has been to answer calls immediately. In 2013, the amount of pensions and compensation paid totalled EUR 1,490.4 million (EUR 1,384.7 million), showing an increase of approximately 7.6 per cent in pension expenditure. The share of old-age pensions in total pension expenditure was EUR 1,166 million (EUR 1,055 million). EUR 175 million (EUR 177 million) was paid in disability pensions, EUR 96 million (EUR 92 million) in survivors pensions, EUR 412 million (EUR 9 million) in unemployment pensions and EUR 14 million (EUR 16 million) in part-time pensions. A total of EUR 13 million (EUR 11 million) was paid to support rehabilitation. The number of pensioners grew by more than 2 per cent, standing at 125,266 (122,729) at the end of There were no disruptions in the payment of pensions during the year. The total number of pension decisions rose slightly to 12,097 (11,566 in 2012) decisions. The number of old-age pensions granted was 4,598 (4,196), and the number of disability pensions granted 4,733 (4,395). After strong growth in previous years, the increase in applications for vocational rehabilitation has stabilised. The number of rehabilitation commitments made was 848 (891). A total of 417 (300) part-time pensions were granted in The processing times of pension and rehabilitation applications in LocalTapiola Pension clearly outperformed the industry average. Decisions were issued, on average, 10 per cent faster than the industry average. The processing time for old-age pension applications was 9 days faster than the industry average. Positive disability pension decisions were issued 8 days faster than the industry average. For survivors pensions, the difference was 7 days. The processing times of part-time pensions were 3 three weeks faster than those of the competitors. The speed of claims handling was also reflected in customer satisfaction. LocalTapiola Pension monitors the quality of pension application processing by recording the number of negative decisions that are corrected by the Pension Appeal Court. In 2013, 7.1 per cent of negative pension decisions issued by LocalTapiola Pension were amended after investigation by the Pension Appeal Court, while the industry average is 11.9 per cent. This shows that LocalTapiola Pension s approach is better than the average. In 2013, the pension services responded to customers wishes by introducing new electronic services. In autumn, a service was launched to enable private customers and employers to send protected to the company. A text message service allows us to inform customers of the status of their pension application process faster and in more detail than before. The TEL supplementary pension scheme will be abolished in Finland by the end of New TEL supplementary pension contracts have not been concluded since The TEL supplementary pensions earned will remain paid up. At the end of 2013, there were approximately 900 people insured under about 60 TEL supplementary pension policies in LocalTapiola Pension. If these companies wish to continue offering the supplementary pension benefit to their employees after 2016, they still have about two years to conclude a contract for a policy replacing the TEL supplementary insurance. In 2013, more than 70 customer events were organised for the employees of LocalTapiola Pension s corporate customers. To meet our customers wishes, many of these events addressed working capacity management methods and vocational rehabilitation within the pension system, which has become increasingly important in the management of working capacity and disability risks. Information was also provided on statutory earnings-related pension provision, various pension options and applying for a pension, as well as on services offered by the pension company to employers and the insured. 6

9 The vocational rehabilitation service model was developed in cooperation with corporate customers and service providers. The aim has been to better integrate rehabilitation into working capacity management. In some customer companies, the improved service has already reduced the number of permanent disability pensions. In recent years, LocalTapiola Pension has developed new electronic services for the insured and pensioners. An electronic application service for old-age pension was introduced in March 2013, which accelerates the processing of applications. The user-friendly service was well received by customers. As many as one in five applications are already submitted through the electronic service. Around 70 per cent of pension estimates were provided online. The use of the electronic pension service among pensioners has also increased compared to previous years. Through the service, pensioners can order pension certificates or employee pension cards, submit new bank account details or raise their tax rates. INVESTMENTS As global growth prospects strengthened in 2013, shares outperformed all other asset classes. Share prices in developed economies returned an average of over 19 per cent in euro terms. In fixed income investments, government bonds in the euro zone returned 2.2 per cent. On the foreign exchange market, the euro strengthened against all major currencies. The total return on investments was 5.4 per cent (9.0% in 2012). At the end of 2013, the fair value of investments was EUR 10,443.1 million (EUR 9,935.8 million), and net investment income at current value came to EUR million (EUR million). In the long run (over the last 10 years), the average nominal return on investment has been 5.3 per cent and the real return 3.3 per cent. The year 2013 was strong in the stock market, with the exception of emerging stock markets, whose return fell short of that of developed markets. LocalTapiola Pension s equity investments were the best-performing asset class, with a return of 14.1 per cent (16.3%). The proportion of equity investments in the portfolio was further increased in the second half of the year. Listed equity investments, which totalled EUR 3,129.7 million (EUR 2,603.4 million) at the end of 2013, generated a return of 14.7 per cent (16.9%). Equity allocation was 34.9 per cent at year-end. Finland s share of listed equity investments was approximately 17 per cent. Due to the gradual increase in interest rates, interest income remained lower than the previous year. The proportion of fixed income investments in the portfolio was reduced during the year, totalling EUR 4,631.5 million (EUR 4,980.6 million) at year-end. Fixed income investments returned 0.2 per cent (7.4%). Corporate bonds performed best among fixed income investments, their return standing at 2.6 per cent at the end of the year. LocalTapiola Pension s interest risk was reduced during the year. The modified duration, which indicates the interest rate risk of fixed income investments, was 3.2 years (4.4 years) at year-end. In 2013, LocalTapiola Pension increased the proportion of alternative investments in its investment portfolio. These investments mostly consisted of hedge fund investments, but investments were also made in commodity markets. Alternative investments are made in order to spread the risks of other asset classes. Alternative investments returned 5.5 per cent. The annual return on unlisted equity investments was a good 9.8 per cent (30.9%). As observed in recent years, LocalTapiola Pension continued to be an active player in the domestic private equity market. An example of this was its participation in the acquisition of Fortum s electricity transmission networks in Finland in December This acquisition is the third largest in Finland s history and underlines LocalTapiola Pension s roles as a domestic player in a nationally significant acquisition. LocalTapiola Pension continued to invest actively in private equity funds in New commitments were made to six funds, most of which operate in Europe. Although the private equity funds in the company s portfolio were more active than expected in returning capital, the current values of these funds rose to EUR million (EUR million) over the course of the year. The annual return on private equity funds was 10.7 per cent (8.4%) in At the end of 2013, the current value of LocalTapiola Pension s direct real estate investments totalled EUR 1,073.8 million (EUR 1,002.5), and the rate of return was 3.8 per cent (5.2%). LocalTapiola Pension s real estate investments generated a stable cash flow, as the occupancy rate of the premises increased despite challenges on the rental market. The total return on direct real estate investments was affected by the rise in return requirements for office premises, in particular. At the end of the year, investments in real estate private equity funds totalled EUR million. The fund portfolio returned 5.4 per cent, the best annual return since the financial crisis that started in Six new investment commitments were made to international real estate private equity funds. In addition, indirect real estate investments were made in Finland, making use of the favourable market conditions. RISK MANAGEMENT In terms of insurance risks, setting premiums too low intentionally in order to reduce the high equalisation provisions for the disability pension business and the premium loss business resulted in a decrease of LocalTapiola Pension s equalisation provision by EUR 10 million in Ensuring the pension company s solvency bears significance for the sustainability of the entire pension scheme and social stability. Since the beginning of 2013, solvency has been measured with solvency capital, which is the sum of the solvency margin and the equalisation provision. At the same time, the share of clearing reserve comparable to the solvency margin was deducted from the solvency margin. In LocalTapiola Pension, solvency management has been handled jointly by the company s actuarial function and investment and risk management units. Investment matters and the company s solvency have been discussed at every meeting of the Board of Directors. In 2013, the focus in the development of risk management was on merger arrangements and the preparation of methods and tools for solvency and investment risk management in Elo, from the date on which the authorities allowed adequate exchange of information with the other party. 7

10 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company LocalTapiola Pension s solvency remained strong throughout the year, despite the fluctuations in the stock market in the spring and summer, and the company was able to take more investment risks during the latter half of the year. The proportion of equity investments increased by about four percentage points compared to the end of the previous year. This was due to the growth caused by market fluctuations and the active efforts made to increase the amount of investments. In developed markets, interest rates rose on an annual level. Both interest rate risk and the amount of fixed income investments were reduced during the year. The amount of money market investments and alternative investments was increased during the year. The company s solvency ratio, i.e., the solvency capital in relation to technical provisions, remained at a highly secure level throughout the year, enabling the risk level to be raised at the end of the year. The solvency ratio was 25.1 per cent at the end of 2013, and the solvency capital was 1.9 times the solvency limit. The merger project, implemented within a tight schedule, involved major operational risks. The organisation of the project included systematic identification and monitoring of the risks associated with the project as a whole and its parts. In terms of operational risk management, deviations related to the pension company s operations are recorded and discussed on a regular basis in various organisational units. In addition to the merger project, LocalTapiola Pension has successfully performed its basic tasks, and no serious risk events have occurred during the year. The Board of Directors has been provided with half-yearly reports on the status of risks and risk management. The section Risks and risk management in the notes to the financial statements contains more detailed information on LocalTapiola Pension s risk management. PERFORMANCE AND SOLVENCY The company s overall result was EUR 70.2 million (EUR million). Investment income at current value was EUR 62.7 million (EUR million) and the return on investments 5.4 per cent (9.0%). The TyEL insurance business showed a loss of EUR 9.9 million (EUR 8.4 million). This was due to the unwinding of the equalisation provision, jointly agreed upon in the earnings-related pension sector, executed through a discounted disability pension contribution and premium loss component. The TEL supplementary insurance business produced a profit of EUR 0.3 million, but EUR 0.6 million was released from the equalisation provision to the solvency margin, due to the upper limit having been exceeded. LocalTapiola Pension s loading profit was EUR 17.0 million (EUR 17.9 million). Operating expenses were 74.9 per cent (72.3%) of the premium loading profit. The company s share of customer bonuses resulting from cost efficiency is half of the loading profit, i.e., about EUR 8.5 million. Total operating expenses increased by 11 per cent from the previous year to EUR 68.5 million (EUR 61.6 million), mainly due to the merger preparations. A total of EUR 29.3 million (EUR 27.8 million), or 0.48 per cent (0.47%), of the TyEL payroll will be transferred to customer bonuses. From the beginning of 2013, solvency is calculated using the solvency capital, which is the sum of the solvency margin and the equalisation provision. The company s solvency ratio remained at a good level, standing at 25.1 per cent (27.0%). The solvency position was 1.9 (2.7). The solvency ratio excluding the equalisation provision would have been 22.0 per cent (without temporary changes in legislation 21.9% in 12/2012) and the solvency position 1.7 (2.2). CORPORATE GOVERNANCE LocalTapiola Pension is a mutual pension insurance company, as defined in the Pension Insurance Companies Act. In addition to the Pension Insurance Companies Act, its management and supervision are regulated by the Insurance Companies Act and the Companies Act, as well as regulations, provisions and instructions issued on the basis thereof. LocalTapiola Pension reports its corporate governance in the annual report and financial statements. General Meeting The highest power of decision is exercised by shareholders at the General Meeting. Detailed information on the distribution bases of voting rights are available in the Articles of Association. The General Meeting elects the members of the Supervisory Board, adopts the profit and loss account and balance sheet, and grants discharge from liability to the members of the governing bodies and the managing director. The 2013 Annual General Meeting was held on 18 April An Extraordinary General Meeting held on 19 June 2013 approved the merger between Pension Fennia and LocalTapiola Pension and a change of the company name to Elo Mutual Pension Insurance Company from 1 January Supervisory Board In accordance with the Pension Insurance Companies Act, a pension insurance company must have a Supervisory Board. It is the task of the Supervisory Board to supervise the company s management by the Board of Directors and the managing director. The Supervisory Board elects the members, deputy members, chairman and vice chairman of the Board of Directors and decides on the fees paid to the members of the Board. The Supervisory Board also elects the members, chairman and deputy chairman of the Electoral Committee. The term of a Supervisory Board member is three years. LocalTapiola Pension s Supervisory Board consisted of 28 members. A minimum of half of the Board members are elected from among persons nominated by the central labour market organisations representing employers and employees. The Chairman of LocalTapiola Pension s Supervisory Board was Hannu Anttila and the Deputy Chairman was Kaarlo Julkunen. The Supervisory Board met three times in

11 The salaries and remunerations paid to the Supervisory Board members, their pension commitments, monetary loans and terms thereof, as well as guarantees and contingent liabilities are presented in note to the profit and loss account. Electoral Committee The Electoral Committee prepares a proposal for the selection of Supervisory Board members and their remuneration to the General Meeting and a similar proposal to the Supervisory Board concerning the members of the Board of Directors. The members of the Electoral Committee must be members of the company s Supervisory Board or Board of Directors. The Chairman of the six-member Electoral Committee was Ilkka Brotherus and the Deputy Chairman was Kaarlo Julkunen. Board of Directors The Board of Directors is responsible for the company s corporate governance and appropriate organisation of operations. The key tasks of the Board of Directors include determination of the strategic policies of the company, confirmation of the investment plan and risk management plan, as well as preparation of matters to be discussed at the General Meeting. The Board evaluates its own operations and working methods annually with the objective of improving its work. The Board of Directors comprised 12 ordinary members and 3 deputy members. The Supervisory Board appoints the members of the Board of Directors on the Electoral Committee s proposal. The term of a Board member is three years. The Supervisory Board elects the chairman and vice chairman for the Board of Directors, one of whom must be a person nominated by representatives of the insured. Composition of the Board of Directors in 2013: Ordinary members: Harri Miettinen, Chairman of the Board, b M.Sc. (Econ.), Senior Vice President, SOK, Confederation of Finnish Industries (EK) Ann Selin, Vice-Chairwoman of the Board, b Chairwoman, Service Union United (PAM) Matti Huutola, b Vice Chairman of the Board of Directors of the Central Organisation of Finnish Trade Unions (SAK) Jari Karlson, b M.Sc. (Econ.), CFO, Orion Plc Timo Lindholm, b M.Soc.Sc., emba, Deputy Managing Director, Federation of Finnish Enterprises Outi Lähteenmäki-Lindman, b Master of Laws trained on the bench, Country Manager, Director (Group Legal Affairs), Accountor Group Erkki Moisander, b B.Sc. (Econ.), Chairman of the Board of Directors and President, LocalTapiola Group Leena Mörttinen, b Dr.Pol.Sc., Director, Competitiveness and Growth, Confederation of Finnish Industries (EK) Arto Okkonen, b Chairman of the Board of Directors, Imagon Oy Heli Puura, b Master of Laws, Legal Adviser, Finnish Confederation of Salaried Employees (STTK) Jari Sundström, b Master of Laws trained on the bench, Group Director, LocalTapiola Group Penna Urrila, b M.Soc.Sc., Senior Economist, Confederation of Finnish Industries (EK) Deputy members: Jari Eklund, b M.Sc. (Econ.), Group Director, LocalTapiola Group Eeva-Liisa Inkeroinen, b Master of Laws, Director, The Federation of Finnish Technology Industries Jorma Tilander, b Master of Laws, Executive Director, Association of Finnish Lawyers, AKAVA The salaries and remuneration paid to the members of the Board of Directors, their pension commitments, monetary loans and terms thereof, as well as guarantees and contingent liabilities are presented in note to the profit and loss account. Board committees The Audit Committee prepares matters relating to financial reporting and supervision to the Board of Directors. Its duties include discussing the financial statements and the semi-annual report, supervising and assessing risk management, assessing internal control and internal audit, and monitoring the work of auditors. The Chairman of the Audit Committee was Jari Karlson and the members were Heli Puura and Penna Urrila. The Nomination and Compensation Committee prepares the nomination and compensation matters to be discussed by the Board of Directors. The committee also monitors the development of the employee compensation scheme and reports on this to the Board. The Chairman of the Nomination and Compensation Committee was Harri Miettinen and the members were Erkki Moisander and Ann Selin. Managing Director and Acting Managing Director The managing director and acting managing director are appointed by the Board of Directors. The managing director manages the company s operational affairs in accordance with the instructions and orders issued by the Board of Directors. The Managing Director was Satu Huber and the Acting Managing Director was Deputy Managing Director Keijo Kouvonen. In 2013, the salaries and fringe benefits of the Managing Director, Satu Huber, totalled EUR 440,898, of which EUR 142,490 constitutes merit pay. EUR 68,478 of this merit pay is for 2012 and EUR 74,012 for previous years. The managing director s merit pay is determined on the basis of how well the expected results set by the Board of Directors have been realised. 9

12 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company The retirement age of the managing director is 63 years. In addition to the statutory earnings-related pension, the managing director has a supplementary pension scheme, which is the same as for LocalTapiola Pension s entire personnel. The supplementary pension accrued annually is 0.2% of the basic salary. For 2013, the supplementary pension contribution for Huber was EUR 53,500, which had accrued since The share for 2013 was approximately EUR 12,000.The compensation for premature termination of employment is a sum corresponding to 12 months salary. The company s management group, investment management group and Risk Management Committee provide assistance to the managing director. Advisory committees The advisory committees serve as an interactive channel between customers and LocalTapiola Group, supplementing administration. The Pension Affairs Advisory Committee acts as a cooperative body of labour market organisations and the pension company, providing statements on issues such as disability pension applications. The Advisory Committee for the Insured is a cooperative body of the employees insured and entrepreneurs. Auditor On 18 April 2013, the General Meeting elected Authorised Public Accountants PricewaterhouseCoopers Ltd as the auditor. The auditor-in-charge is Authorised Public Accountant Juha Wahlroos. The remuneration paid to the audit firm is presented in note 3.4 to the profit and loss account. PERSONNEL AND REMUNERATION At the end of 2013, LocalTapiola Pension employed 211 people in total. The average age of the employees was 42 years. Women accounted for about 73 per cent of the employees and men for about 27 per cent. LocalTapiola Pension employees have a versatile educational background as the range of jobs is so diverse. Employees include business administration experts, political scientists, humanists, lawyers, mathematicians and doctors as well as technology and IT experts. During the merger process, LocalTapiola Pension s HR management has focused on healthy and satisfied personnel as a strategic resource. Taking care of the personnel s expertise and well-being at work enables the implementation of the business strategy. HR management objectives have been based on the company s own strategy as well as LocalTapiola Group s values and personnel policy. LocalTapiola Pension s focus areas adopted in the responsibility commitments have been taking care of the personnel s well-being at work and advancing good supervisory work. Active and professional competence The aim has been to ensure the personnel s wide-ranging and high-standard business expertise by making use of the competence of LocalTapiola Pension s and the Group s employees. During the reporting period, the development of competencies was ensured through competence surveys and development plans for each employee and unit in line with the established operating model. Diversification of job descriptions and change of duties supported the deepening of expertise. In the development of professional skills, special emphasis was placed on a model of multiple skills and the sharing of skills through on-the-job learning. Responsible and inspiring management Good and fair daily management was the basis for management and supervisory work also when preparing for the merger. In the middle of constant change, managerial and supervisory skills are put to the test. The importance of employee well-being and working capacity management as a business success factor is also increasing all the time. In the autumn, all supervisors attended change management training and, where necessary, group coaching. The change management skills of those with managerial and supervisory duties have also been expanded by means of an HR Clinic, where the focus has been on providing support for daily management and advice on how to handle challenging situations as a supervisor. Motivated, healthy and satisfied personnel LocalTapiola Pension s objective has been to ensure that its employees are motivated and committed and that they value their work, which is especially important during the merger process. When preparing the merger, attention has been paid to supporting change management among all employees, not only supervisors. Five events were organised for the entire personnel in cooperation with the occupational healthcare provider. The events focused on the challenges and opportunities of change and introduced support networks for various situations. Telecommuting has been widely used in a range of units in order to increase efficiency and support employee wellbeing. HR planning and remuneration The purpose of HR planning has been to ensure that the structure, quantity and skills of the personnel meet the needs of the strategy and business. The required new expertise has been acquired primarily from within the Group. Employees have been encouraged to pursue internal transfers and to increase cooperation between units. In transitions into retirement, work communities have also paid attention to transferring expertise and to resourcing. The possibility to modify the job s content and to apply more flexibility as needed have been introduced. LocalTapiola Pension has applied the joint salary and remuneration policy of LocalTapiola Pension and LocalTapiola Group, which has been approved by LocalTapiola Pension s Nomination and Compensation Committee and which LocalTapiola Pension s Board of Directors has decided upon. The management s annual remuneration was based on the performance of LocalTapiola Group companies and elements affecting the result. The indicators were based on official key figures. The management s long-term remuneration consisted of elements measuring solvency and growth. In these, remuneration was determined using competitor comparison based on official key figures. The remuneration was established as the product of the 10

13 outcome rate of the above-mentioned elements, the maximum remuneration percentage based on the position level and the annual salary. The maximum remuneration percentages for LocalTapiola Pension s management varied between 20 and 70 per cent in annual remuneration and between 10 and 30 per cent in long-term strategy-based remuneration. The amount of merit pay granted to LocalTapiola Pension s professional employees could not exceed 7 per cent of their annual salary. The objectives were determined on the basis of the Group s and LocalTapiola Pension s strategy, and they could be either team-specific or personal. The achievement of targets has been evaluated in performance review discussions. For certain people involved in risk management who worked in duties supporting investment activities, the maximum annual merit pay may not have exceeded 20 per cent of the annual salary. Persons in LocalTapiola Pension s investment organisation had a separate long-term merit pay model where the merit pay was determined for a three-year period on the basis of investment returns. Long-term strategybased remuneration levels varied annually between 0 and 33 per cent of the annual salary. For annual remuneration, the maximum remuneration percentages for persons in the investment organisation varied between 7 and 100 per cent. Based on the results, annual payments have also been made to LocalTapiola Group s personnel fund, established in This profit bonus item has mainly been determined by the companies profits in accordance with the Act on Personnel Funds. Other elements have included efficiency and growth as well as service quality. According to preliminary calculations, the payment made to the personnel fund for 2013 is EUR 288,192. Cumulatively, LocalTapiola Group has made payments totalling EUR 37.1 million to the personnel fund during its operation. GROUP Pension Group structure In addition to the parent company, LocalTapiola Pension, LocalTapiola Pension Group comprises the following subsidiaries: Elkes Oy (share of ownership 100%) and Tapra Ky (100%), as well as 68 (66) housing cooperatives and real estate companies as subsidiaries. Associated undertakings are Vakuutusneuvonta Aura Oy, Vakuutusneuvonta Pohja Oy, Suomen Metsäsijoitus Oy, Oirabi Oy, Exilion Capital Oy and 3 (3) real estate companies. Consolidated financial statements The figures concerning the insurance business of LocalTapiola Pension s parent company and the Group are identical. The Group s profit for the financial year amounted to EUR 2,136, The balance sheet total is EUR 9,410,803, (9,037,526,974.11). FUTURE PROSPECTS Financial operating environment Global economic growth accelerated in the second half of 2013 and, based on anticipatory indicators in developed economies, economic conditions are also expected to strengthen in the early part of All in all, 2014 will be better than the previous year in terms of economic growth. In the eurozone, the basic economic trend is more favourable than last year. However, there is no strong upswing in sight just slightly positive growth at best. High unemployment and a moderate increase in salaries will slow down the recovery of consumer demand. On the other hand, weak growth prospects do not encourage investments and the public authorities will have no choice but to tighten their belts. Competitive devaluations and protectionism, in turn, will put a brake on global trade recovery. The sources of sustainable growth will continue to be scarce. During 2014, GDP development in the most important emerging economies is expected to set out on a new path of long-term growth. This means growth of about 6 7 per cent for China and India and a growth rate of about 3 4 per cent for Brazil and Russia. The Finnish economic situation will continue to be challenging in the coming years. Since the problems concern specific key industries instead of being a result of a cyclical drop, Finland s export sector will not necessarily pick up in the wake of global economic recovery, as has been the case in the past. The outlook for domestic markets also remains clouded. Rising unemployment and a very moderate increase in salaries will slow down the recovery of consumer demand. Moreover, slow growth will not encourage investments and the public authorities will have to cut costs. In the coming years, Finland s GDP growth will depend on the growth of productivity. Due to the aging of the population, the dependency ratio will weaken and the number of working-age citizens will decrease by around 0.6 per cent every year over the next 10 years. The employment rate should rise considerably over the same period in order for the economy to avoid negative growth due to the demographic shift. Prospects in the pension sector Early old-age pension, which has enabled retirement at the age of 62 by reducing the amount of pension, was abolished from the beginning of At the same time, the minimum age for part-time pension was raised from 60 to 61 years. These changes are part of a series of measures aimed at raising the average retirement age. A recent study shows that 63 has become the standard retirement age, and postponement of retirement is very rare outside the highly educated population group. Negotiations between labour market organisations on the reform of the pension system are underway. The reform should enter into force in Besides the extension of working lives, the main objectives of the reform include securing the financing of the pension scheme, sufficiency pension provision and equality between generations. In 2014, the pension sector will continue to work on the reform of solvency standards. A key motive for the merger between LocalTapiola Pension and Pension Fennia was seeking efficiencies for the benefit of the customers. By establishing Elo, the companies are preparing for reforms such as the one under consideration at the Ministry of Social Affairs and Health, which would possibly make the expense loading included 11

14 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company in pension insurance contributions company-specific. At the time of writing of this report, the expense loading for covering policy management expenses is the same for all companies. LocalTapiola Pension to continue under the name Elo LocalTapiola Pension and its predecessors have managed earnings-related pension issues of the Finns since the establishment of the pension scheme in The company s strengths have included fast and high-standard handling of claims and pension decisions praised by customers, well-being at work services for corporations, which have received excellent feedback, strong solvency position and investment activities. The company has made a strategic choice to offer services as part of the extensive financial service offering of the LocalTapiola Group. Elo, which launched operations on 1 January 2014, will play a major role in the pension insurance market. The company s combined investment assets amount to approximately EUR 18 billion. Elo s premium income of around EUR 3 billion corresponds to a market share of just under 25 per cent in the pension insurance market for the private sector. Elo s accomplished experts will be centrally involved in the development of the pension system in conjunction with labour market organisations, political decision-makers and the authorities. The new company will invest in the user-friendliness of its services, the improvement of employee well-being and corporate lending. Elo will act as the pension insurance partner of LocalTapiola, Fennia and Turva, meaning that its services will be available all over Finland. The company is domiciled in Tapiola, Espoo, where around [470] industry experts settled in December Elo Pension Company s first year of operation will be busy. The alignment of the new company s operating models and operational processes with the strategic objectives will require systematic management and excellent cooperation within the organisation. A major step forward was taken in the harmonisation of IT systems in 2013, but additional efforts will be needed after the reporting period in order to reach the final target. For employees, this means that redundancies related to many other mergers will not be needed at Elo. Increasing cooperation between industry players is one example of a good way of cutting costs. The merger between LocalTapiola Pension and Pension Fennia and the founding of Elo have been welcomed as good news from this perspective as well. The cornerstones of the new company are cost-efficiency and the provision of highquality pension services to its customers. As a large pension provider, Elo will be an important operator in the pension sector. LocalTapiola Pension s customers and employees, who at the time of writing of this report are already Elo Mutual Pension Insurance Company s customers and employees, can view the future with confidence, despite the significant challenges and major changes in the operating environment. The company s responsible and transparent operating model will continue to be a stable basis for handling earnings-related pensions. Events after the financial year After the 2013 financial year, the merger of LocalTapiola Pension and Pension Fennia took place on 1 January Pension Fennia merged with LocalTapiola Pension, which was the receiving company. From 1 January 2014, the company has been called Elo Mutual Pension Insurance Company. 12

15 Notes to the financial statements Accounting principles The accounts of LocalTapiola Mutual Pension Insurance Company have been prepared in accordance with the Accountancy Act, the Companies Act, the Insurance Companies Act and the Pension Insurance Companies Act. In addition, the Decree of the Ministry of Social Affairs and Health on financial statements and consolidated financial statements of insurance companies and the provisions of the Accounting Decree, as prescribed in the above Decree, are complied with. Finally, the decisions, regulations and instructions issued by the authorities regulating insurance companies the Ministry of Social Affairs and Health and the Financial Supervisory Authority are adhered to. Valuation and allocation of intangible assets Other long-term expenditure Other long-term expenditure includes capitalised costs of renovations in flats and design costs of IT systems. These are stated in the balance sheet at cost less planned depreciation. Valuation and allocation of investments Real estate and shares in real estate Buildings and other constructions are stated at cost less planned depreciation or at current value, whichever is lower. Shares in real estate are stated at the lower of cost and current value. Revaluations may have been made on the values of real estate and shares in real estate if the values were significantly higher over a long period of time than the historical cost at the end of the financial year. The counteritem of the revaluation of real estate or shares in real estate classified as investments has been entered as income since Previous value adjustments of investments are reversed in the profit and loss account at most up to the historical cost if the current value rises. Shares and holdings Shares and holdings are stated at the lower of cost and current value. Acquisition cost is calculated using the average price method. Previous write-downs of shares and holdings are reversed to the extent that the current value exceeds the book value. Loaned securities are included in the balance sheet. Information on loaned securities is presented in the notes to the balance sheet. Debt securities Debt securities include bonds and other money market instruments. Debt securities are stated at cost in the balance sheet. Acquisition cost is calculated using the average price method. The difference between the nominal value and acquisition cost of debt instruments is released or charged to interest income during the term to maturity. The counter-item has been entered as an increase or decrease of the acquisition cost of the debt security. Temporary value adjustments and those owing to interest rate fluctuations have not been recognised. Write-downs arising from other reasons have been recorded, as have value readjustments, if the current value of a debt security has at a later date exceeded the adjusted acquisition cost, at most up to the original acquisition cost. Loans, deposits and deposits with ceding undertakings Loans and deposits are stated at nominal value or permanently lower likely realisable value. Derivative contracts Derivative contracts are mainly used for hedging investment portfolios. In the accounts, derivatives are primarily treated as non-hedging, even though they are effective for hedging purposes. Gains and losses incurred during the financial year from the closing or lapsing of contracts have been entered as income or expenses for the financial year. Non-hedging derivatives A negative difference between the current value and higher book value of a non-hedging derivative or a derivative treated as non-hedging is entered as an expense. Unrealised gains are not recognised. Application of hedging calculation When using hedging calculation, a decrease in the value of a derivative is not entered to the extent that an increase in the value of the hedged item covers the change. Any loss exceeding the increase in the value of the hedged item is entered as an expense. The difference between the current value and the lower book value of a derivative is entered as income from the hedged item up to the amount entered as expense. If no value change is entered in the profit and loss account for the hedged balance sheet item, no valuation income or expense arising from the hedging derivative is recognised. 13

16 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company Valuation of receivables Premiums receivable Premiums receivable are stated at their maximum likely realisable value. Receivables that are not likely to be settled are recognised as credit losses. In the event of bankruptcy, credit losses are recorded immediately. Foreign currency items Receivables and liabilities in foreign currencies have been translated into euros at the rates quoted by the European Central Bank on the day of closing of the accounts. The rate used for other investments is that of the moment of acquisition or of the day of closing of the accounts, whichever is lower. Exchange rate differences have been entered as adjustments on the income and expenses concerned. Exchange rate differences concerning cash at bank and in hand and deposits, as well as items that cannot be entered directly as adjustments on income or expenses, have been recognised as exchange gains or losses from investment activities. Depreciation Acquisition costs of buildings and their components, equipment, intangible rights and long-term expenditure have been capitalised and are entered as expenses under planned depreciation over their expected useful lives. The estimated average depreciation periods of the various commodity groups are as follows: Intangible assets Renovations in flats IT system design expenses 5 yrs 5 10 yrs Real estate Residential, office and hotel buildings yrs Department store buildings and other store buildings yrs Industrial buildings, warehouses and similar buildings yrs Building components, reducing balance method 25% The effect of renovations in buildings on their lifetime is assessed separately. As regards revaluations released to income, depreciation has been carried out according to the expected useful life of the item in question. The accumulated difference between write-offs in the accounts and depreciation according to plan is recorded in the balance sheet under liabilities, in the item Accumulated appropriations, depreciation difference, and the increase or decrease during the financial year is stated in the profit and loss account as a separate item. Accumulated appropriations Depreciation difference See Depreciation Voluntary provisions Based on accountancy and fiscal legislation, no such provisions have been made that should be entered in the income statement. Obligatory provisions Pension expenditure arising from future obligations that concerns the most recently or previously ended financial year has been deducted from income as obligatory pension provisions. Direct taxes Direct taxes have been entered in the profit and loss account on an accrual basis. Deferred tax assets and tax liabilities Deferred tax assets and liabilities pertaining to timing differences between taxable profit and accounting profit and to other temporary differences are shown in the notes to the financial statements. The notes include deferred tax liability calculated from the valuation gains/losses that is deemed likely to become payable during the next year. Other liabilities Liabilities other than technical provisions are stated in the balance sheet at nominal value. Definition of current value of investments Real estate investments Real estate and shares in real estates are stated at marketbased current values. The valuation principles and practices as set out in the IVS (International Valuation Standards) and good real estate valuation practices (so-called AKA criteria) are applied in the valuation of real estate investments. Residential buildings are valued using a sales value method based on reference sales. Commercial real estate is valued using a yield value method based on cash flow or a sales value method if representative sales price data is available. Values of special items are defined using a market-based evaluation method deemed best suited for the item. The current value of real estate funded by state housing loans is the assignment price as defined in section 10 of the Act on the Use, Assignment and Redemption of State-Subsidised (ARAVA) Rental Dwellings and Buildings (1190/1993). Valuations are either conducted by external authorised property valuers or Tapiola Real Estate Ltd s experts, instructed and audited by an external authorised property valuer in accordance with the requirements of the Financial Supervisory Authority. Shares, holdings and debt securities As regards quoted securities and securities for which there is a market, the latest trading price or, if not available, the bid price is used as the current value. Current value of 14

17 other investments is the likely realisable value, book value or value based on substance. The current value of private equity funds is the acquisition cost or the management company s estimate of the fund s current value. Loans, deposits and deposits with ceding undertakings The current value of loans, deposits and deposits with ceding undertakings is the nominal value, taking into consideration any reduction in the nominal value to the likely value required by the risk of credit loss. Account of the personnel s pension cover and the allocation of pension expenditure The personnel s statutory pension cover has been arranged through basic Employees Pensions Act (TyEL) insurance taken out from LocalTapiola Mutual Pension Insurance Company and supplementary cover from LocalTapiola Mutual Pension Insurance Company, where benefits include old-age, disability and survivors pension, as well as death benefit for family members. As a rule, the supplementary pension increases the pension annually by 0.2 per cent of the annual income on which the pension as defined in the Employees Pensions Act is based. Employees are entitled to the additional benefit after five years of employment. The supplementary pension encompasses the entire period of employment. The general retirement age of the members of the Board of Directors employed by LocalTapiola Group is years. The retirement age of the managing director is 63 years. The retirement age of other directors is the general retirement age, i.e., years. The supplementary pension cover has been arranged through a supplementary pension with LocalTapiola Mutual Life Assurance Company. Pension insurance contributions have been recorded on an accrual basis. Technical provisions Technical provisions are calculated in accordance with the calculation bases confirmed by the Ministry of Social Affairs and Health. Provision for unearned premiums Technical provisions are calculated in accordance with the calculation bases confirmed by the Ministry of Social Affairs and Health. The provision for unearned premiums includes the provision for future bonuses which is taken into account when calculating the solvency margin. The provision for current bonuses shows the amount reserved for bonuses and rebates of policyholders. The provision for unearned premiums also includes equity-linked provisions for current/future bonuses. The amount of provision may also be negative. The annual change in the equity-linked provision depends on the share based on the average annual return on equities of the pension institution s actual technical provisions as defined in the Employees Pensions Act. In 2012, the equity-linked provision accounted for 10 per cent of the technical provisions. Profit for financial year A pension insurance company s profit for a financial year is determined by the calculation basis confirmed by the Ministry of Social Affairs and Health. The calculation basis defines how the book profit is divided into change in equalisation provision, change in provision for current and future bonuses and profit for the financial year. Consolidated financial statements The Insurance Companies Act stipulates that those limited companies and other comparable companies in which the parent company holds more than half of the voting rights either directly or indirectly be included in the consolidated accounts. The companies included in the Group and the Group structure are described in the annual report. The consolidated financial statements are a combination of the profit and loss accounts, balance sheets and notes of the parent company and its subsidiaries. The following are eliminated in these consolidated statements: intra-group receivables and liabilities, income and expenses, profit distribution, internal gains and losses, and mutual share ownership. Share ownership within the Group has been eliminated using the acquisition method. Minority interest in capital and reserves and profit is shown as a separate item in the profit and loss account and balance sheet. Subsidiaries acquired during the financial year are included in the consolidated statements as of the acquisition date, and subsidiaries sold during the period up to the moment of sale. Associated companies, i.e., companies in which the Group holds 20 50% of the votes, have been included in the consolidated statements using the equity method. Housing and mutual real estate companies are not combined as associated companies in the consolidated financial statements even when the requirements for votes and ownership are met. Non-mutual real estate associated undertakings have been consolidated as associated corporations. Deferred tax assets are recognised in the consolidated profit and loss account and balance sheet. The change in voluntary provisions and depreciation difference has been divided between the change in deferred tax liabilities and profit. The corresponding balance sheet items have been divided into deferred tax liabilities and capital and reserves, taking into account the minority interest. The revaluations of the housing and real estate subsidiaries shares have been entered as revaluations of the subsidiaries real estate. The consolidation goodwill arising from the elimination has been allocated primarily to the subsidiary s assets, taking into account their current value. The consolidation goodwill will be amortised according to plan, in line with other assets. Unallocated consolidated goodwill is recorded in the balance sheet under Intangible assets as a separate item and will be amortised according to plan over five years. Group reserve is included in the balance sheet under Liabilities as a separate item and released to income within a maximum of five years. 15

18 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company General risk management principles This note describes the risk management principles of the company that has been operating under the name of Elo Mutual Pension Insurance Company since 1 January In 2013, the name of the company was LocalTapiola Mutual Pension Insurance Company, aka LocalTapiola Pension. In this report, the company is referred to as LocalTapiola Pension. 1. Basis for risk management and risk-taking Risk management policies are determined by the Board of Directors. The quality of risk management has been improved in order to secure business continuity and increase LocalTapiola Pension s competitiveness. Risk management in a pension insurance company focuses on the stability and responsibility of operations. Good solvency plays a major role due both to the responsibility involved in the management of pension provision and to profit distribution rules. Risk-taking has occurred within the limits set by the risk appetite defined by LocalTapiola Pension s Board of Directors. The risk appetite has been based on the following principles: Risk-taking supports LocalTapiola Pension s strategic intent and reaching of targets. LocalTapiola Pension conducts its investment activities independently with the aim of securing investment assets and generating the highest returns at the chosen level of risk, within the framework of its solvency and technical provisions. Risks are defined so that they do not threaten the operations or stability of the company. The impact of the risks on all parts of the organisation can be identified and taken into account in the operations. 2. Key areas of risk management The following categorisation has been used in LocalTapiola Pension s risk classification: Risks associated with the operating environment and strategy Financial risks Business risks Risks associated with the operating environment and strategic intent have included Risks related to strategic choices Changes in the market position, competitive situation or customer behaviour Risks related to general development of the operating environment. Operating environment and strategic risks Risks associated with the general operating environment Risks associated with the markets and customer behaviour Risks caused by the nature of competition and by competitors Risks related to strategic choices Risks related to operating as a group and to group investments Operating environment and strategic risks Operational risks Financial risks Operational risks Process risks Systemic risks Personnel risks External factors Legal risks Risks of damage and incidents Risks related to business choices Financial risks Risks related to solvency management Market risks Credit risks Liquidity risks Concentration risks Insurance risks 16

19 Financial risks have consisted of solvency management, insurance, market, credit, liquidity, operating expense and centralisation risks, as well as risks associated with operating expenses. Solvency management risks have referred to the risk of weakened solvency, which would undermine the company s tolerance of insurance or investment risks. Insurance risk has referred to the risk associated with insurance contracts, resulting from the risk related to the adequacy of premiums and technical provisions. Market risk has been caused by fluctuations in market values and has been the result of changes in financial variables, such as interest rates, share prices, exchange rates or the value of real estate. Credit risk has been related to counterparty insolvency or other negligence in fulfilling contractual obligations. Liquidity risk has referred to a company not having sufficient liquid assets to fulfil its future obligations or not being able to make assets liquid without extra cost. Centralisation risk has referred to an individual customer accounting for a considerable share of premium income or to a significant share of investment assets being concentrated in individual investments. Business risks have been divided into operational risks and risks related to practical operational choices. Operational risk has referred to the risk of losses caused by insufficient or failed internal processes, personnel, systems or external factors. Legal risks and risks of damage are included in operational risks. Risks associated with operational choices include risks related to various business change situations. 3. Risk management implementation LocalTapiola Pension s aim has been to manage risks in a comprehensive manner as part of its strategic and operational activities. Risk management has been systematically arranged, covering all risks, so that it has included the identification of the cause and significance of risks Management of risks associated with strategic intent and operating environment Significant risks related to the operating environment and LocalTapiola Pension s strategic intent have been identified and the probability of their occurrence, as well as their significance if they occurred, has been regularly assessed in conjunction with annual risk management planning. The implementation and effects of risk management actions have been monitored on a regular basis in operative units and by the management. The company s Board of Directors has confirmed the risk management plan annually and has reviewed the risk management progress report every six months Financial risk management A pension provider s solvency and investment risk management are key factors in the management of financial risks. LocalTapiola Pension has conducted its investment operations with the aim of securing its solvency and maximising its returns with managed risk-taking. The investment of assets has been guided by the limits set by solvency, the structure of technical provisions and eligibility for the solvency margin, as well as the return requirement on technical provisions and the demand to ensure the company s liquidity. Investment operations have aimed at reaching a high and stable return in the long term in all conditions while avoiding the risk of losing capital. Investment management has also aimed to ensure adequate liquidity under all circumstances. Solvency management LocalTapiola Pension s solvency has been monitored using calculations in compliance with the Financial Supervisory Authority s regulations in conjunction with both financial statements and each interim report. In accordance with the rules of procedure of the Board of Directors, the company s actuary has reported to the Board on the solvency position four times a year. In conjunction with investment reporting, the Board has been presented with a monthly solvency assessment. As a rule, the solvency assessment has also been calculated weekly and, where necessary, daily. The effect of market risk on the company s solvency has been monitored and managed based on current solvency legislation. The basis for market risk management has been that the company s solvency is secured for the next twelve months with sufficient probability. Investment operations have been controlled based on continuous market risk and solvency monitoring. Total risk has been defined so that the solvency capital in relation to the solvency requirement would remain at a secure level also in the event of any of the risks occurring. LocalTapiola Pension has monitored how its investment allocation has deviated from the industry average, and decisions have been made taking the resulting risk into account. Quantitative information on the risk structure of the investment portfolio An investment sensitivity analysis that describes the impact of changes in the values of instruments on solvency capital. Investment sensitivity analysis Share prices 20% Impact of change Value of real estate 10% Interest level +1 percentage point Currencies 10% open position EUR 1,003.2 m Solvency capital duration 3.2 EUR m 2, ,2 155,0 150,0 100,3 % of technical provisions ,8 1,8 1,8 1,2 in relation to solvency limit ,32 0,16 0,16 0,07 Return on investment, % 5.4 7,6 1,5 1,5 1,0 17

20 ANNUAL REPORT 2013 LocalTapiola Mutual Pension Insurance Company Investment allocation and returns 1 january december 2013 Breakdown Breakdown Risk-adjusted Risk-adjusted Return Volatility EUR m % EUR million % % % Loans receivable % % 3.0% Bonds 3, % 3, % 0.0% 2.8% Public sector bonds 2, % 2, % 5.3% Other bonds 1, % 1, % 6.5% Other debt securities and deposits % % 0.1% Fixed income investments 4, % 4, % 0.2% Listed shares 3, % 3, % 14.7% 9.9% Private equity funds % % 10.7% Unlisted equity investments % % 9.8% Equity investments 3, % 3, % 14.1% Direct real estate investments 1, % 1, % 3.8% Real estate mutual funds and collective investments % % 5.4% Real estate investments 1, % 1, % 4.2% Hedge funds % % 5.0% 2.3% Commodity investments % % Other investments % % Other investments % % 5.5% Effect of derivatives % Total investments 10, % 10, % 5.4% 3.0% *Bonds, modified duration 3.6 Investment risks The management of risks associated with investment activities has been one of the core processes of LocalTapiola Pension s investment operations and an important part of the investment policy. Limits and diversification targets in line with the company s investment policy and targets are set for risks in such a way that the company s solvency would not be endangered under any circumstances. Investment allocation and other return and risk targets and limitations have been specified in the investment plan confirmed annually by the Board of Directors. LocalTapiola Pension has used its internal analysis tool to support its asset class allocation decisions, taking into consideration returns, dispersions and correlations among different asset classes. The overall solvency of the pension insurance sector has also been taken into account. The so-called strategic allocation thus calculated describes the investment class allocation that is likely to generate the best result enabled by the company s solvency. The asset class weightings have been reviewed several times a year. Key investment risks include market risks, counterparty risks, liquidity risks and operational risks. Market risk refers to the possibility of losses from investments as a result of changes in market prices or volatility. Market risks include equity risk, interest risk, currency risk, commodity risk and the risk caused by changes in real estate values. Equity risk refers to changes in share prices in the markets. The unsystematic equity risk, i.e., a risk relating to a company or an industry, can be reduced by diversifying investments across several investment objects and also geographically across several different regions. Systematic equity risk is created as a result of changes in the economic situation and sudden market disturbances. Interest risk refers to the impact of the general interest rate level and credit risk margins on fixed income investments. Currency risk is created when investments other than euro-denominated investments are made without currency hedging. Counterparty risk refers to the inability of the other contracting party to fulfil its obligations, such as paying interest, capital or rent. When defining risk limits, the aim has been to take into account the likelihood of the counterparty s insolvency and to avoid creating excessively large risk concentrations. Liquidity risk refers to the weakening of the company s own ability to meet commitments due to a lack of liquid funds. In order to ensure liquidity, LocalTapiola Pension has kept a sufficient proportion of its investments in liquid assets and taken into account the repayment schedules of investments. To ensure sufficient liquidity, a part of the investments has been kept in short investment instruments. The aim has been to manage, monitor and report on investment risks in accordance with good industry practices. Risks have been monitored both through internal control within the investment organisation and by a risk monitoring function independent of the organisation making investment decisions. Return on investment has also been regularly compared with market returns and competitors returns. The key targets and limits defined in the investment plan have been monitored daily. Standard-form reports have been submitted to the Board of Directors monthly. With regard to operational risks, the company has complied with its own general operational risk management procedures in investment activities. Technical risk management The majority of LocalTapiola Pension s insurance business for 2013 consisted of pension insurance under the Employees Pensions Act (TyEL). Furthermore, the company offered supplementary Employees Pensions Act (TEL) coverage and Self-Employed Persons Pensions Act (YEL) coverage. TyEL pension insurance The risks involved in TyEL pension insurance concern retirement pensions, disability pensions, unemployment pensions and credit losses on premiums. For survivors 18