FINANCIAL STATEMENTS - vuosikertomus.ilmarinen.fivuosikertomus.ilmarinen.fi/.../files/documents/ilmarinen_tp11_en_v09… · ILMARINEN IN 2012 Report on operations 3 REPORT ON OPERATIONS

FINANCIAL STATEMENTS

ILMARINEN IN 2012

2

ContentsReport on operations _______________________3Profit and loss account _____________________14Balance sheet ____________________________15Cash flow statement _______________________17Notes to the accounts _____________________18 Accounting principles ___________________18 Notes to the profit and loss account and balance sheet __________________________21 Key figures and analyses _________________37 Risk management ______________________41Proposal of the Board of Directors for the disposal of profit _______________________50Auditors’ report ___________________________51

REPORT ON OPERATIONS AND FINANCIAL STATEMENTS 2012

Part of the notes to the official financial statements have been omitted since they are almost identical in both the parent com-pany and the Group, or they are otherwise of minor impor-tance, or because the same information is apparent from the Report on Operations.

The following notes were omitted:• investment in real estate• specification of investment in group companies and partici-

pating interests• changes in tangible and intangible assets• specification of receivables• specification of debts other than technical provisions• notes to consolidated accounts excluding specification of

net investment income, operating expenses and capital and reserves plus specification of costs of staff members and corporate organs.

ILMARINEN IN 2012 Report on operations

3

REPORT ON OPERATIONS 20121. Economic dEvElopmEntFinland’s economy came close to a recession in 2012. The economic recovery that took place following the deep down-turn in 2009 began to decelerate already in the autumn of 2011 and, during 2012, economic growth came to an almost com-plete standstill. This was a Europe-wide phenomenon, arising from the European debt crisis, which had already lasted for several years. The eurozone sovereign debt crisis continued and gave birth to increasing uncertainty in the capital markets. Simultaneously, many European countries were attempting to decrease their public deficits by tightening their financial poli-cies, which in turn nearly stopped the economic growth of the entire eurozone in its tracks. As a result of slowing growth in the eurozone, unemployment figures continued to rise. This environment also meant a weak development in Finnish exports.

During 2011, the European sovereign debt crisis spread from Greece, Portugal and Ireland, countries with earlier debt-related problems, to Italy and Spain, where government bond interest rates started to rise. The situation remained extremely unstable during early 2012. The threat of the debt crisis spread-ing to the eurozone’s larger economies caused nervousness in the markets, as a result of which interest rate differences increased and share prices took a downward turn in the second quarter of the year. A significant turn of events occurred in summer 2012 when the ECB reported that it was prepared to take unlimited support measures in order to secure the stability of the euro, if required. Following this announcement, market confidence began to improve. During the second part of the year, the interest rates of the crisis countries’ government bonds began to decline and European share prices began to rise. The returning confidence of investors did not, however, cause the real economy to develop in a more positive direction.

The growth percentage of the Finnish economy was close to zero in 2012. The downturn in the global economy led to shrinking exports. The favourable development of private con-sumption prevented the economy from sliding deeper into the downturn. The confidence and income development of house-holds remained relatively good. The number of employed con-tinued to increase during the early part of the year but saw a downward trajectory towards the end of the year. Unemploy-ment also began to grow towards year-end, but the annual aver-age unemployment for 2012 remained below 8 per cent and was thus very close to the corresponding figure for the previous year. The employment rate remained at 69 per cent, with no significant changes taking place since the previous year. Payroll growth slowed down to around 3.5 per cent from the previous year’s figure of 5 per cent. The key reason for this was the poor development of the payroll for industry. The increase in con-sumer prices decelerated somewhat during 2012, also in com-parison with 2011. The annual average increase in prices was 2.4 per cent.

The 2009 economic crisis led to a considerable deficit in Finland’s budget. Economic recovery began to decrease the

deficit in 2011 but the halting of growth in 2012 also meant that the recovery of government finances was interrupted. The government budget deficit stabilised at approximately EUR 7 billion. In order to rectify the situation, the government decided in early spring 2012 to implement tax hikes and expenditure savings to balance out the government budget in 2013–2016. The decided measures will simultaneously restrict the growth of households’ purchasing power and domestic demand.

The development of share prices in Finland and in Europe was turbulent during the early part of the year. During the lat-ter half of the year, share prices began to rise strongly, ulti-mately turning 2012 into a good investment year. The stock index of the Helsinki Stock Exchange rose around 10 per cent during the year. Additionally, the returning confidence boosted the return on fixed-income investments. The return on pension funds’ investments at current value clearly exceeded expecta-tions in 2012 and clearly surpassed the long-term average return.

12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12

175

150

125

100

75

50

25

OMX Helsinki Cap Europe DJ Stoxx 600 USA S&P 500

Stock market performance (31.12.2005 = 100)

12/07 12/08 12/09 12/10 12/11 12/12

35

30

25

20

15

10

5

0

Greece Portugal

Ireland Italy

Spain France

Germany

Interest rates on 10-year government bonds in the eurozone, per cent p.a.


4

Finnish business and industry interest groups as well as many experts have been in favour of a gradual increase in the retire-ment age. In many European countries decisions have already been made to raise the retirement age. In Finland the parties have not, however, taken a strong stand on the issue nor does the Government Programme include any mention of it. The issue has been left to be solved by the labour market organisa-tions within the pension negotiation working group. Wage earn-ers’ organisations have, to date, expressed their opposition to the raising of the retirement age and public opinion has not warmed to the issue either. According to a survey conducted by the Finnish Centre for Pensions, the majority of wage earn-ers and employers consider the current pension age limits to be suitable.

Solvency reform and other earnings-related pension sector regulation

Following the steep decline in share prices caused by the financial crisis, the Finnish Parliament enacted a temporary act in autumn 2008, amending the solvency regulations of pension insurance companies on a temporary basis until the end of 2010. In spring 2010, the validity of the act was extended by another two years to the end of 2012. In 2011, the Ministry of Social Affairs and Health set up a new working group to pre-pare a permanent amendment to the solvency regulations. In its spring session, the Parliament passed a partial amendment in which the pension institutions’ use of capital would be boosted by combining the solvency capital intended to cover investment risks and the equalisation provision created for insurance risks, into a new type of solvency capital. The amend-ment came into force at the start of 2013. The working group set up by the Ministry of Social Affairs and Health will con-tinue its work on the overall reform of the solvency framework.

The survey on the competitive conditions of the earnings-related pension system continued at the Ministry of Social Affairs and Health during the year under review. The aim of the reform is to increase the competitiveness of the earnings-related pension sector by making the provisions concerning the determination of insurance contributions more liberal in the sense that each pension insurance company could indepen-dently prepare the calculation bases for both the expense load-ing contained in the insurance contribution and for client bonuses.

The policies adopted by pension insurance companies in projects aimed at maintaining working capacity have gained more attention and regulation in this area will be developed by the Ministry of Social Affairs and Health.

Reaching an agreement on earnings-related pension contri-butions for 2013 proved challenging. The renewal of the sol-vency regulations made the equalisation provision included in the solvency capital a topic of surprisingly wide-spread public debate. Many demands were presented in the media for the surplus that has accrued in the pension companies’ equalisa-tion provision to be reduced through a deduction in earnings-related pension contributions. On the other hand, the Social Agreement between the labour market organisations includes a prior agreement concerning an increase in the average earn-ings-related pension contribution during 2011–2014 by 0.4 percentage points per year. Finding a negotiated solution was

2. dEvElopmEnts in thE Earnings-rElatEd pEnsion systEmAn exceptionally rapid change in the population’s age structure is taking place in Finland in the 2010s, as the baby-boomer age groups are preparing to retire. As a result of this change, the number of pensioners will grow rapidly and the old age dependency ratio will rise faster than in most other industrial countries. This development is enhanced by the rising life expectancy. The change in age structure, together with the weakened employment rate following the 2009 downturn, have started up an extensive social debate concerning the need to lengthen careers and raise the average retirement age. On the one hand, the goal is to improve the long-term sustainability of public finances and, on the other, to improve labour supply incentives so that a large enough labour force will exist even if the number of working-aged people declines.

Working career policyThe positive development of working careers and employment ceased in 2012. The employment rate of 55 to 64 year-olds, a key group in terms of working career targets, did not improve due to the weakened employment situation. Despite this, the retirement age expectancy remained above the set target, just as in 2010. The retirement age expectancy has, so far, increased more rapidly than the targets set during and after the pension reform in 2005.

The labour market organisations signed an agreement for extending careers in March 2012. It contained decisions involving changes in early retirement channels and earnings-related pension contributions and set a timetable for the next pension reform. According to the agreement, early old-age pen-sion will be discontinued and the age limit for part-time pen-sion will increase by one year. The right to receive the contin-ued unemployment benefit, i.e., the unemployment path to retirement, will correspondingly be deferred by one year. The changes will come into force gradually during 2013 and 2014. The organisations also agreed that the average earnings-related pension contributions would be raised by 0.4 percentage points per year in 2015 and 2016. The increment will be split evenly between the employer and employee. In connection with the decision, agreements were made concerning measures for improving unemployment security incentives and improving well-being at work and occupational health care.

The organisations also agreed that a pension reform will be implemented in 2017 at the latest. Nearly all of the parameters related to employment pensions will be under negotiation dur-ing the preparations for the pension reform. The objective of the reform is to lengthen working careers and to strengthen the financial foundation of the pension system. A group of high-level experts led by Jukka Pekkarinen, Director General of the Economics Department at the Ministry of Finance, was appointed to investigate the sustainability and change require-ments of the earnings-related pension system in view of future negotiations. The working group will continue its investigations until the end of 2013.

Raising the retirement age has so far appeared to be the most problematic issue during the negotiations concerning working careers. The raising of the minimum old-age pension limit from 63 years to 65 years has been discussed in public since 2009.


5

no simple matter, but eventually the labour market organisa-tions agreed that a one-time discount of 0.4 percentage points would be applied to the contributions for 2013. In practical terms, the decision means that the contribution for 2013 will remain at the previous year’s level.

3. ilmarinEn’s rEsult and solvEncy 2012 was a good investment year for Ilmarinen despite the euro crisis and weak outlook at the beginning of the year. Stock prices increased dramatically in the second half of the year, which raised the annual return on investments to 7.5 per cent and improved Ilmarinen’s solvency. The real return on invest-ments equalled 5.0 per cent, i.e. 1.3 percentage points higher than the long-term average.

Ilmarinen succeeded well in the competition for pension cus-tomers. An increase in the customer base and premiums writ-ten during the year spoke of customers’ confidence in the com-pany. The loading profit, which describes the efficiency of oper-ations, in turn weakened and the ratio of operating expenses to expense loading components rose to 80 (74) per cent. The increase in expense ratio was largely due to greater develop-ment investments.

The net return on Ilmarinen’s investments, calculated at cur-rent value, was 7.5 per cent in 2012 (-4.0 per cent in 2011). Solvency capital, i.e. the difference between the company’s assets and liabilities measured at current value, increased to EUR 5,752.4 million from EUR 4,808.7 million in the previ-ous year. At the end of 2012, solvency capital amounted to 23.9 (21.1) per cent of technical provisions used in the calculation of solvency. The solvency capital includes the amount of EUR 1,003.6 (951.2) million in provision for pooled claims treated equal to solvency capital, in accordance with the temporary legislation. Without this item, the solvency capital would have amounted to EUR 4,748.8 (3,857.5) million and the compa-ny’s solvency ratio to 18.9 (16.2) per cent.

The solvency capital is intended to cover the risks inherent in investments. The monitoring limits for the solvency capital of pension insurance companies are determined by the level of risk inherent in the company’s investments, which is estimated by dividing the investments into classes according to risk and by calculating the solvency limit based on the classification. The classification is made on the basis of the actual risk of the investment. Ilmarinen’s solvency capital at the end of the finan-cial period was 2.2 times the solvency limit, compared to 2.5 a year earlier. Without the temporary item according to the tem-porary legislation, the solvency position would have been 1.7 (2.0).

Investment income at current value was EUR 911.2 million (EUR 1,756.2 million negative in 2011), when taking into account the interest credited on technical provisions, EUR 813.9 (959.7) million, and the EUR 323.2 million increase (a EUR 356.4 million decrease in 2011) in the equity linked buffer. The equity linked buffer ties, for ten per cent, the tech-nical provisions to the average return on listed equities of pen-sion funds and thus transfers the equity risk to be covered by the entire earnings-related pension system.

The underwriting result under the company’s own responsi-bility was EUR -7.0 (-69.4) million and its loading profit

amounted to EUR 27.0 (33.7) million. The underwriting result is the difference between contribution components intended to cover insurance risks and claims incurred. The underwriting result will be transferred to the equalisation provision accord-ing to the criteria prescribed by the Ministry of Social Affairs and Health. The loading profit shows the amount by which the expense loading components and other similar income exceed the operating expenses to be covered by them. The loading profit will be transferred to the solvency capital to the extent where it is not used for client bonuses.

Ilmarinen’s total financial result in 2012 at current value thus stood at EUR 931.2 (-1,791.9) million.

The amount allocated for discounts on TyEL insurance con-tributions, i.e. client bonuses, is determined based on the com-pany’s solvency capital and loading profit. EUR 62.0 (55.0) million will be allocated for client bonuses from the result for 2012. The transfer is 0.37 (0.35) per cent of the insured payroll and EUR 117 (107) per employee insured with Ilmarinen.

The above information concerning the result and solvency are based on the key figures calculated at current value pre-sented in the notes to the financial statements. They show the company’s financial result and position more clearly than the profit and loss account and balance sheet. The valuation of investments in official accounting is based on acquisition cost and the amount of profit in the profit and loss account is deter-mined by the calculation base approved in advance by the Min-istry of Social Affairs and Health. The difference between the book profit and the result in the profit and loss account is entered as technical provisions, excluding the change in depre-ciation difference. In 2012, the result in the profit and loss account was EUR 3.0 (5.8) million.

The following calculation shows the connection of the result in the profit and loss account to the total financial result at cur-rent value:

Eur million 2012 2011

Result in the profit and loss account 3.0 5.8

Change in technical provisions

Change in equalisation provision -10.9 -71.0

Change in provision for future bonuses 59.8 -1,153.9

Transfer to client bonuses 62.0 55.0

Change in depreciation difference 0.2 0.1

Change in the difference between current value and book value, i.e. valuation gain/loss 817.1 -627.8

Profit at current value 931.2 -1,791.9

4. insurancE portFolio and prEmiums WrittEn Ilmarinen was successful in customer acquisition together with its partners OP-Pohjola Group and Pohjantähti. The transfer of insurance policies between Ilmarinen and other pension insurance companies increased Ilmarinen’s customer numbers and premiums written considerably.

The majority of employers that have insured their employees with Ilmarinen have signed an insurance contract with the company. Employers only employing temporary employees can, however, pay their employer contributions to a pension


6

EUR 3,732.8.3 (3,468.3) million in TyEL insurance contribu-tions were received, i.e. TyEL premiums written increased 7.6 per cent compared to the previous year. In 2012, discounts in TyEL contributions, i.e. client bonuses, totalled EUR 54.8 million, compared with EUR 70.8 million in the previous year.

YEL premiums written stood at EUR 286.5 (257.2) million, an increase of 11.4 per cent.

Credit losses on unpaid TyEL insurance contributions amounted to EUR 12.7 (13.1) million. Therefore the payment collection situation remained good. Credit losses on unpaid TyEL insurance contributions amounted to EUR 2.5 (2.5) mil-lion. Ilmarinen will not, however, incur losses on the YEL credit losses due to the fact that the State’s share in the financing system for YEL pensions compensates for insurance contribu-tions not received from policyholders.

A total of 3,733 new TyEL insurance policies were sold. This will increase the annual TyEL premiums written by EUR 91.7 million during 2013. Ilmarinen’s performance in transfers of TyEL insurance from other pension insurance companies was excellent: Its TyEL insurance portfolio increased by 1,292 pol-icies and premiums written by EUR 48.0 million.

A total of 6,659 new YEL insurance policies were sold. This will increase the YEL premiums written by EUR 26.6 million. Ilmarinen’s performance in the transfer of YEL insurance pol-icies was also excellent, the transfer resulting in 1,400 new policies and a gain of EUR 6.4 million.

5. contriBution lEvElThe confirmed average TyEL contribution for 2012 was 22.8 per cent of an employee’s salary or wages, i.e. 0.4 percentage points higher than in the previous year. The share of contribu-tion for employees aged under 53 was 5.15 per cent and 6.50 per cent for those aged 53 and over. The average contribution for employers was 17.35 per cent of payroll. The employer contribution level varies depending on the insurance policy as well as the client bonuses paid by the pension insurance com-pany. Ilmarinen’s client bonuses were on average 1.9 (2.6) per cent of the employer contribution.

The average confirmed TyEL contribution for 2013 is 22.8 per cent of an employee’s salary or wages, i.e. the same as in 2012. The basic percentage will increase by 0.4 percentage points according to the Social Agreement concluded by the

insurance company without signing an actual insurance con-tract.

Ilmarinen’s investment portfolio and the number of people insured increased during the operating year. The number of TyEL insurance policies at the end of 2012 stood at 37,462 (36,511), up by 2.6 per cent. In addition to employers with insurance contracts with Ilmarinen, 3,666 (3,745) temporary employers paid TyEL contributions to the company. At the end of the year, 529,000 (515,000) insured were covered by TyEL insurance policies, which was around 2.7 per cent more than a year earlier. The number of insured thus increased clearly more than the number of wage earners in the whole economy. The average size of TyEL insurance policies in 2012 remained at 14 (14).

2008 2009 2010 2011 2012

600,000

500,000

400,000

300,000

200,000

100,000

0

Under TyEL Under YEL

Number of people insured

2008 2009 2010 2011 2012

5,000

4,000

3,000

2,000

1,000

0

TyEL policies YEL policies

Premiums written, EUR million

The TyEL payroll insured at Ilmarinen was EUR 16,694.2 (15,923.8) million, up 4.8 per cent from the payroll insured in the previous year. The market share calculated from the insured TyEL payroll amount is estimated to have risen slightly in 2012 compared to the previous year.

At the end of the year, Ilmarinen had 58,776 (56,717) YEL insurance policies, which is 3.6 per cent more than a year ear-lier. The company’s position as the market leader for YEL insurance remained strong. Ilmarinen is clearly the largest insurer of self-employed persons, and the company’s market share, measured in premiums written, has ranged from 30 to 31 per cent in recent years. The average annual reported income for YEL insurance policies was EUR 23,302 (22,410). It increased by about 3.9 per cent from the previous year, or by more than the wage coefficient to which YEL reported income is tied and which increased 3.0 per cent.

In 2012, Ilmarinen’s premiums written stood at EUR 4,019.3 (3,725.5) million, up 7.9 per cent from 2011. The increase in premiums written was due, in addition to the rise in payroll in the national economy, to higher TyEL contribu-tions and the increase in Ilmarinen’s market share.


7

social parties in early 2009. The contribution to be paid will not, however, rise because the social parties agreed on a one-time discount of 0.4 percentage points for 2013. The average employer contribution as well as the earnings-related pension contribution percentage for employees will thus remain unchanged.

The YEL contribution for 2012 was 22.5 per cent of con-firmed earned income. The YEL contribution for self-employed persons who had turned 53 before the start of the financial year was, however, 23.85 per cent. In 2013 the contributions will remain unchanged.

6. pEnsions and activitiEs to maintain WorKing capacity In 2012, around 22,000 people insured at Ilmarinen retired on earnings-related pensions, which is slightly more than during the previous year. In 2012, Ilmarinen paid a total of EUR 3,848.4 (3,568.9) million in pensions. Pension expenditure increased by 7.8 per cent from the previous year, and contin-ued to grow quickly, just as in previous years.

Pension expenditure according to type in 2012Eur million tyEl yEl total %

Old-age pensions 2,554.3 202.9 2,757.2 71.6

Early old-age pensions 242.3 21.8 264.1 6.9

Part-time pensions 29.5 6.2 35.7 0.9

Disability pensions 434.4 29.5 463.9 12.1

Unemployment pensions 26.9 0.4 27.3 0.7

Survivors’ pensions 271.7 28.5 300.2 7.8

Total 3,559.1 289.3 3,848.4 100.0

The majority of the EUR 3.8 billion in pension expenditure consisted of old-age pensions. Disability pensions made up approximately 12% of the pension expenditure.

Number of pension recipients on 31 December 2012 Pensions in accordance with basic protectiontype of pension tyEl yEl total %

Old-age pensions 181,988 23,896 205,884 66.9

Early old-age pensions 15,738 3,358 19,096 6.2

Part-time pensions 2,988 672 3,660 1.2

Disability pensions 32,350 3,464 35,814 11.6

Unemployment pensions 99 3 102 0.0

Survivors’ pensions 36,436 6,942 43,378 14.1

Total 269,599 38,335 307,934 100.0

At year-end the number of pension recipients was 307,934, which is 1.9 per cent more than a year earlier, when they num-bered 302,093. At the end of the year, 269,599 (265,033) pension recipients received TyEL pensions and 38,335 (37,060) received YEL pensions.

Pension decisions 2012

number 2012 2011 change,

%

New pension decisions

Old-age pensions 9,415 8,632 9.1

Early old-age pensions 655 631 3.8

Part-time pensions 606 1,025 -40.9

Disability pensions 6,520 6,636 -1.7

Unemployment pensions 21 308 -93.2

Survivors' pensions 3,096 3,048 1.6

Right to rehabilitation 2,067 1,846 12.0

Total new pension decisions 22,380 22,126 1.1

Total pension decisions 41,051 40,713 0.8

Retirement in Ilmarinen’s client base continued as expected. During 2012, Ilmarinen made a total of 41,051 pension deci-sions, or 0.8 per cent more than during the previous year. The number of new pension decisions increased by 1.1 per cent in 2012 and a total number of 22,380 were granted, including decisions concerning the right to rehabilitation. The number of disability pensions declined slightly from the previous year but the number of old-age pensions increased clearly (+9.1%) as did decisions concerning rehabilitation (+12%).

Ilmarinen measures the quality of the processing of pension applications by ensuring that no interruptions occur in the applicant’s income, as well as based on the permanence of deci-sions in appeal instances. Of the negative decisions sent to the Pension Appeal Court (Työeläkeasioiden muutoksenhakulau-takunta TELK), 14.4 (13.8) per cent were amended against Ilmarinen’s position. The share of amended decisions was slightly higher than the average share of amendment decisions made by the Pension Appeal Court. 20.2 (19.2) per cent of the decisions sent to the Insurance Court were amended against Ilmarinen’s position.

Ilmarinen had faster processing times for pension applica-tions in 2012 than on average in the peer group, excluding the processing of disability pension decisions, which became con-gested in the early part of the year. The total processing time for disability pension applications in 2012 was 72 (68) days on average.

2008 2009 2010 2011 2012

4,000

3,000

2,000

1,000

0

TyEL YEL

Benefits paid out, EUR million

Ilmarinen’s pension premiums written equalled just over EUR 4 billion, which is EUR 170 million more than the pension expenditure.


8

Ilmarinen offers its customers receiving negative disability pen-sion decisions a guidance service on issues such as securing a livelihood and continuing in working life. The service is pro-vided by rehabilitation research institutes and work clinics throughout Finland that have concluded co-operation agree-ments. Feedback received from customers, employers and service providers on the service has been positive.

Ilmarinen was responsible for mailing pension records to approximately 576,600 insured persons. During July–Novem-ber, around 542,000 pension records were mailed and in April–November, around 35,000 insured persons retrieved their pen-sion records from the online service.

A total of 12,000 individual pension insurance policies were reviewed in response to customers’ queries.

For Ilmarinen’s well-being at work services, 2012 was an extremely active year, just like the previous one. Ilmarinen organised 40 seminars on well-being at work for its client com-panies throughout Finland, attracting around 2,000 partici-pants. During the year, Ilmarinen also had 1,200 distinct coaching or other well-being at work projects underway in co-operation with clients. Co-operation with clients is systematic and goal-oriented and the projects are always targeted at jointly identified challenges related to well-being at work. As a general rule, co-operation is based on writ-ten agreements and the results produced by the services are monitored through cus-tomer surveys, for example.

This monitoring shows that the services have improved well-being at work and reduced disability risk in client companies.

Ilmarinen also supports the management of disability risks in its client companies through voca-tional rehabilitation. This service includes training provided to supervisors and advisory services as well as expert support for both supervisors and employees during the rehabilitation planning phase. The popu-larity of vocational rehabilitation continued to rise; in 2012 the increase was over 12 per cent. More than 2,200 new applica-tions for the right to rehabilitation were processed. Dur-ing the actual rehabilitation period, the company pays benefits pursu-ant to earnings-related pen-sion legislation, which support the individual’s income during the rehabilitation and compensate for the costs resulting from the training. Close to 4,300 benefit decisions related to rehabilitation were made in 2012, which was an 8.7 per cent increase on the previous year.

7. undErWriting BusinEss, tEchnical provisions and portFolio transFErs At the end of 2012, Ilmarinen’s technical provisions totalled EUR 25,585.9 (24,205.5) million. The provision for future bonuses, which serves as a buffer for investment losses, increased by net EUR 71.3 million and stood at EUR 477.6 (406.3) mil-lion at the end of the year. The equity linked buffer increased also due to the rise in share prices by net EUR 322.4 million and stood at EUR 167.3 (-155.1) million at the end of the year. Otherwise, the increase in technical provisions was 4.1 per cent.

The underwriting result under the company’s own responsi-bility was EUR -7.0 (-69.4) million. The equalisation provision decreased by EUR 10.9 million to EUR 986.0 million. The difference between the underwriting result and the change in the equalisation provision resulted from limiting the equali-sation provision of supplementary pension insurance under TEL to its upper limit and transferring the exceeding portion, EUR 3.3 million, to the provision for future bonuses.

Interest is credited on technical provisions on return on investments in compliance with the technical bases. The major-ity of the return requirement on technical provisions of pension insurance companies is determined on the basis of the average solvency of pension institutions, and the remainder, 10 per cent, is tied to the average return on the listed equities owned by the pension institutions. The share of the return requirement determined on the basis of the average solvency of pension institutions is calculated by adding the pension liability sup-plementary coefficient, given in the technical bases, to the three per cent discount rate. The interest credited on technical provi-sions totalled 4.6 per cent in 2012, of which the return tied to the equity linked buffer equalled 1.3 per cent. A 3.3 per cent return was credited on the remaining technical provisions.

The technical interest rate used to calculate insurance con-tributions was 3.25 per cent in the first half of the year and 4.00 per cent in the second half.

Assets that cover technical provisions stood at EUR 29,936.8 (27,845.9) million.

In 2012, two company pension funds transferred their port-folios to Ilmarinen in part or in full. The liability transferred to Ilmarinen, together with the adjustment items related to the previous year’s portfolio transfers, totalled EUR 106.7 million, of which the provision for future bonuses made up EUR 11.5 million.

Breakdown of technical provisions Eur million 2012 2011

Provision for unearned premiums

Future pensions 13,088.5 12,734.3

Provision for future bonuses 477.6 406.3

Provision for current bonuses 62.4 55.2

Equity linked buffer 167.3 -155.1

Total 13,795.8 13,040.7

Provision for claims outstanding

New pensions awarded 10,804.0 10,167.8

Equalisation provision 986.0 996.9

Total 11,790.0 11,164.7

Total technical provisions 25,585.9 24,205.5

Une

mp

loym

ent

80706050403020100

Ilmarinen Other TyEL/YEL institutions

Source: The Finnish Centre for Pensions 31 Dec 2012

Processing times of pension applications 2012, days

Rig

ht t

o re

hab

ilita

tion

Sur

vivo

rs’

Par

t-tim

e

Old

-age


9

8. invEstmEnt opErations A long-term approach is essential in investing pension assets. The objective of Ilmarinen’s investment operations is the high-est possible return on investments in the long term. However, the average risk of the investments should not be too high in relation to the company’s risk bearing ability. The average long-term expected return on Ilmarinen’s investment assets is 6 per cent, and the expected standard deviation of the return is 8 per cent.

The continuation of the eurozone sovereign debt crisis, the threat of it spreading and the eurozone economies sliding back into the downturn caused nervousness in the markets through-out 2012, which led to a decline in share prices during the sec-ond quarter of the year. During the final part of the year, how-ever, the confidence in the markets rose again and share prices showed an upward trajectory in both Europe and the United States. In its entirety, 2012 was a good year for investors.

At the end of 2012, Ilmarinen’s total investments at current value were EUR 29,520.4 (27,484.9) million. The return on investments at current value was 7.5 per cent. With an inflation rate of 2.4 per cent during the year, the real return on Ilmarinen’s investments in 2012 was 5.0 per cent. In 2011, investment port-folio returns were -4.0 per cent, or -6.7 per cent in real terms. Calculated at current value, the average annual return over the last five years has been 1.7 per cent, which corre-sponds to an average annual return of -0.5 per cent in real terms. Calculated from 1997, the average annual return at current value for Ilmarinen’s investments has been 5.6 per cent per annum. This corresponds to an annual real return of 3.7 per cent.

Bonds, fixed income funds and other money market instru-ments formed 36.3 (33.4) per cent of the total value of Ilmarinen’s investment assets. Their total market value, taking into account market value derivatives, was EUR 10,702.2 (9,189.2) million and return at current value was 7.9 (-1.6) per cent. A total of EUR 4,031.1 (4,171.7) or 37.5 (45.4) per cent was invested in bonds issued by governments or other similar issuers. Ilmarinen had EUR 1,976.6 (504.3) million or about 18.5 (5.5) per cent in money market investments, generating a return of 1.9 (-10.9) per cent. The remaining 44.0 per cent were corporate bonds, most of which had a high credit rating. The return on bonds with credit risk was 13.5 per cent. At the end of the year, the modified duration of the bond portfolio was 0.7 (0.2) years.

Ilmarinen’s corporate credit portfolio decreased in 2012 by almost 16 per cent, because companies’ interest towards TyEL relending declined substantially as banks restored their normal financing capacity following the financial crisis. At the end of the year, loan receivables made up 8.0 (10.2) per cent of invest-ment assets. New loans amounting to EUR 218.3 (300.0) mil-lion were drawn down during 2012. At the end of the year, the total loan portfolio was EUR 2,352.0 (2,796.6) million includ-ing accumulated interest. The return on loan receivables was 3.4 (3.3) per cent.

Corporate credit portfolio

Eur million 2002 2007 2012return,

%

Premium loans 1,089.4 284.8 1,166.4 4.2

Lending other than premium loans 470.3 954.5 1,185.6 2.8

Total (includes accumulated interest) 1,559.7 1,239.3 2,352.0 3.4

Share of total portfolio, % 11 5 8

The above-mentioned investments together make up the fixed-income investment class. The investment portfolio share of all of these investments was 44.2 (43.6) per cent and their returns were 6.9 (-0.4) per cent.

Listed and unlisted equities and shares as well as private equity investments made up 38.4 (38.8) per cent of all invest-ments. Their value increased to EUR 11,328.7 (10,661.2) mil-lion in 2012 as a result of rising share prices and share acquisi-tions. Of this, domestic equities made up about 35.3 (40.5) per

The following breakdown of Ilmarinen’s asset allocation and returns abides by the Finnish Pension Alliance TELA’s recom-mendations for the classification of investments according to market value. Both the classification of investments and their returns into different investment types according to official regulations, as well as the table according to the recommenda-tions are included in the notes to the financial statements.

2008 2009 2010 2011 2012 5 years

20151050-5-10-15-20

Ilmarinen Other companies on average

Net investment return, %

2008 2009 2010 2011 2012

100

80

60

40

20

0

Stucture of Ilmarinen’s investment assets, %

Equities and shares Real estate Other Fixed-income


10

cent, or EUR 4,000.7 (4,322.8) million. Domestic equities made up 35.3 (40.4) per cent of investments in listed equities and shares. The return on equities, calculated at current value, was 9.5 (-13.6) per cent.

Real estate investments at the end of 2012 stood at EUR 3,465.7 (3,237.1) million, a 7.1 per cent change from the pre-vious year. The share of real estate investments was 11.7 (11.8) per cent, of which indirect investments made up 1.8 percentage points. The value of directly-owned properties was EUR 2,942.9 (2,736.5) million. The occupancy rate of real estate owned by Ilmarinen decreased from the previous year and was 88.4 (92.6) per cent at year-end. However, the occupancy rate was close to the long-term average.

Equity, currency and interest derivatives are used both for hedging and for altering the risk level of the investment port-folio. As a result of using derivatives, the amount of equities and shares according to risk deviated at the end of the year from their amount according to market value. Calculated using the method agreed on by the employment pension institutions, their amount according to risk was EUR 10,829.1 million, i.e. 36.7 per cent of investments. The effect of interest derivatives is included in the modified duration of the bond portfolio reported above.

According to the responsible investment principles included in Ilmarinen’s ownership policy, Ilmarinen will start an engage-ment process with a company that fails to fulfil the criteria set forth in the policy. If the engagement process does not lead to the desired end result, the investment is sold. Additionally, Ilmarinen refrains from acquiring investments whose opera-tions do not fulfil the required criteria. During 2012, Ilmarinen was involved in several hundred engagement processes.

2008 2009 2010 2011 2012

100

80

60

40

20

0

Credit rating classes of bonds (incl. fixed-income funds), %

AAA AA A BBB <BBB NR

Real estate investment structure on 31 Dec 2012

Office 32% Commercial 26% Residential 19% Other direct investments 8% Indirect investments 15%

2008 2009 2010 2011 2012

100

80

60

40

20

0

Geographical breakdown of listed equities (incl. funds), %

Finland Europe USA Japan Emerging markets

Real estate values increased slightly and rent levels showed a mildly positive development. The total return on the company’s real estate investments was 5.1 (6.4) per cent. The return on direct real estate investments was 5.6 (5.9) per cent. The return on direct real estate investments was increased by a capital growth of EUR 9.3 million. The net return on direct real estate investments before changes in value was 5.3 per cent. The return on indirect real estate investments was 2.2 (8.9) per cent.

Commodity investments and investments in absolute return funds are classified as “other investments” according to TELA’s recommendations. At the end of the year, other investments made up about 5.7 (5.8) per cent of the market value of invest-ment assets. Of this, absolute return funds accounted for EUR 349.9 million and generated an average return of 7.7 per cent on capital employed.

9. risK managEmEnt The objective of Ilmarinen’s risk management is to prevent the realisation of risks threatening the company’s operations, minimise the financial and other damage caused by realised risks and to ensure the continuity of operations. Another objec-tive is for the company to be able to utilise the opportunities offered by controlled risk-taking in business operations, espe-cially in investment activities. The most essential goal is to secure Ilmarinen’s statutory operations and the rights of the insured, pensioners and policyholders in all situations.

Ilmarinen has a risk management plan that covers the entire operations of the company and is based on the Board of Direc-tors’ risk management plan. A Risk Management Committee is in place for the company-level monitoring, assessment and development of risk management, made up of organisational unit representatives. The Committee regularly prepares an assessment of the risks facing the company and submits it for approval to the Executive Group and updates the risk manage-ment plan annually. The risk assessments are handled by the Board’s Audit Committee and the Board of Directors. The


11

Board of Directors approved the risk management plan on 25 January 2012.

Risk management within the company, including monitoring of investment risks, and reporting to the Board of Directors fall under the responsibility of the Senior Vice President in charge of the company’s actuarial services and risk management. This ensures the independence of investment activity reporting and risk monitoring from risk-taking functions.

Risk-taking in investment operations is steered by the invest-ment plan approved by the Board of Directors and the related risk tolerance analysis and investment authorisations and other principles determined by the Board of Directors. The risk level and change requirements for the basic allocation are monitored by an Asset Management Group, comprised of representatives of investment operations, the actuarial and risk management function and the finance function. The risk management func-tion also produces scenario and stress tests for monitoring and assessment. In investment operations, risk monitoring and management are continuous.

Work to develop company-level risk management continued according to the approved overall plan. In 2012, a new com-pany-wide reporting system for operational risks was taken into use and the related-party guidelines were updated. In practice, risk management should also be fully integrated into the com-pany’s operations. This is why development work around the company’s management and control system was initiated in order to incorporate seamless risk management into Ilmarinen’s administrative structure. This same goal was also supported by the coaching event held for the company’s supervisors by the Risk Management Committee, which delved deeper into those risk management and internal control tasks that the supervisors are responsible for.

Risk management is described in more detail in the notes to the financial statements.

10. pErsonnEl An average of 612 persons worked for Ilmarinen Group in 2012 compared to 617 in 2011. The average number of employees in the parent company Ilmarinen was 542 (545). This figure includes 78 (71) part-time employees, whose work contribution has been adjusted to correspond with the average working hours of full-time employees. An average of 50 (59) persons were on family leave or other unpaid leave during the year. At the end of the year, the parent company Ilmarinen employed 584 (593) persons, of whom 561 (573) were perma-nent employees.

Ilmarinen has set goals for its personnel costs, and they are covered by the expense loading component. The target for 2012 was for the number of personnel measured in average man years to decline in a controlled manner, i.e. at an annual rate of one per cent per year. The target corresponding to a decline of one per cent was 462 and the realised total 461.

The productivity of the personnel can be measured by mak-ing the number of man years proportional to the number of insured. When man years financed by the insurance contribu-tion’s expense loading component for every one thousand insured are used as an indicator, the figure for 2012 was 0.512

(0.529). Work productivity measured in this manner increased during the reporting year by 3.3 per cent.

Personnel costs covered by investment operations are moni-tored separately by the company. Holding the key functions in the company’s own hands instead of outsourcing them is an important aspect of investment operations. For this reason, the number of personnel increased slightly and equalled, on aver-age, 78 man years (75).

Personnel reported that leadership had remained at the same good level as in previous years. Assessments of leadership measured in particular whether supervisors had abided by the leadership principles launched at the beginning of 2012. The purpose of the principles is to achieve a good level of leadership throughout Ilmarinen. Personnel were particularly satisfied with the work of their immediate supervisors. The know-how of supervisors was improved throughout 2012 through the “Välitä varhain, puutu ajoissa” coaching, which focussed on early intervention. According to the personnel’s assessment, supervisors made the most progress in the areas of caring and intervention as well as in supporting success.

As supervisors are not alone responsible for creating a good work community, Ilmarinen’s personnel principles were cre-ated to back up the leadership principles. They concern every-one within the company, regardless of their position. The prin-ciples were created through crowd wisdom – Ilmarinen’s entire personnel were given the chance to create the building blocks for them over the course of the autumn. Both the leadership principles and the personnel principles serve to strengthen a culture that has the customer at its core and in which the com-pany’s values are a natural part of daily life.

The entire personnel are covered by a short-term remunera-tion system. The goals for performance-based rewards have been set high in order for them to encourage excellent perfor-mance. 2012 was the first year during which the personnel earned rewards according to the remuneration system, which was renewed in 2011.

In recent years, Ilmarinen has focussed its efforts on making remuneration more encouraging, more fair, more objective and more transparent. The efforts bore fruit during the reporting year. The personnel survey for 2012 showed that the personnel consider the remuneration system to be fairer than ever before.

The rewarding of personnel in the long term takes place through a profit-sharing bonus channelled through the person-nel fund. Ilmarinen’s Board of Directors annually decides on the amount of profit sharing bonuses transferred to the fund. Ilmarinen’s personnel fund started operating at the beginning of 2011 and, according to the Board’s decision, the first profit sharing bonus was paid into the fund in 2012.The criteria have been distilled from Ilmarinen’s strategic targets.

The fund includes the entire personnel, except for those cov-ered by the long-term remuneration system for management. The fund is managed by a council and a board elected by the personnel.

11. inFormation tEchnology Modifications to the information systems were continued in connection with several business development projects. During


12

2012, a company-wide document management system, a con-trol system for the TyEL insurance process, a loan system serv-ing investment operations and a modern intranet system ena-bling group work were among the completed modifications.

The improvement of the pension processing system was boosted through the implementation of a preliminary study of the entire decision-making process and through assessments of the available solutions related to the purchasing of the informa-tion system. The planning of future information technology solutions for investment operations was begun through a study of the development of operating models, instruments and oper-ating environment for investments. This work will continue in 2013 with the planning of architecture and system solutions as well as the definition of a development path. The development of a company-wide customer data management system was begun with an analysis of the current situation and through mapping out the information requirements for customer man-agement processes, based on which customer data manage-ment solutions will be implemented in 2013.

The production activities for information technology func-tioned as planned, both in terms of customer services and Ilmarinen’s own operations. The extensive change and improve-ment measures undertaken within the technical environment were achieved without disruption. Regularly implemented comparisons reveal that the information technology services used by Ilmarinen are also very cost-competitive.

12. opErating ExpEnsEsIlmarinen’s cost efficiency weakened somewhat during the financial year in comparison with the previous year. The oper-ating expenses financed using the loading profit increased by EUR 12.7 million, or 13.3 per cent. Due to this, the ratio of the above-mentioned operating expenses to the expense load-ing components available for them rose and was 80 (74) per cent. The increase in operating expenses was largely dependent on the greater information technology and development expenditure. They are used to improve the company’s long-term cost efficiency and operational reliability. The efficiency of operations benefits Ilmarinen’s customers in the form of client bonuses and rebates.

Ilmarinen’s total operating expenses were EUR 144.0 (130.9) million, up 10.1 per cent from the previous year.

The statutory charges, EUR 9.3 million, are financed through a separate part of the insurance contributions allocated to statutory charges. These charges include the share of the costs of the Finnish Centre for Pensions, the supervision charge of the Financial Supervisory Authority and the judicial admin-istration charge.

Operating expenses for investment activities were EUR 20.9 (17.4) million, or 0.07 per cent of the total investment amount. They are financed using the return on investments. Activities were conducted together with clients to maintain well-being at work and working capacity. The costs of maintaining working capacity that are financed from the administration part of dis-ability risk contained in the insurance contribution were EUR 5.1 (5.2) million.

13. corporatE govErnancE and organisationJorma Eloranta was Chairman of the Supervisory Board until the Annual General Meeting of 17 April 2012 and Merja Strengell, Chairman of the Board of the Finnish Association of Graduate Engineers TEK, and Antti Herlin, Chairman of the Board of KONE Corporation, were Deputy Chairmen. Since 17 April 2012, Matti Lievonen, President and CEO, Neste Oyj, has functioned as the Chairman of the Supervisory Board and Kirsi Kaasinen, Vice Chairman of the Board of the Finnish Association of Graduate Engineers TEK, has functioned as the Deputy Chairman. Antti Herlin will continue as the second Deputy Chairman.Kaasinen is the primary Deputy Chairman.

In its meeting on 15 November 2011, the Supervisory Board appointed Sture Fjäder, President of the Confederation of Unions for Academic Professionals AKAVA and Kim Gran, President and CEO of Nokian Tyres plc, as new members of the Board of Directors. Fjäder joined the Board of Directors on 1 December 2011 to replace Matti Viljanen. Gran joined the Board on 1 January 2012 following the departure from the Board of Hannu Syrjänen.

In its meeting on 14 March 2012, the Supervisory Board elected Financial Counsellor Heikki Vitie as a new member of the Board of Directors as of 14 March 2012. Vitie replaced Reijo Karhinen, who left his seat on the Board on 1 March 2012.

Board member Jukka Alho left the Board as of 1 September 2012 and Deputy Chairman Mikko Pukkinen as of 9 Novem-ber 2012. In their stead, the Supervisory Board appointed, in their meeting on 13 November 2012, Hannu Leinonen, Presi-dent and CEO of Destia, as of 13 November 2012 and Jyri Häkämies, CEO, Confederation of Finnish Industries (EK), as of 1 December 2012.

Otherwise, the Board of Directors’ composition remains as before. The deputy members of the Board of Directors are always invited to the Board meetings but they only have voting rights when the corresponding member is not present.

The Board of Directors elected Jussi Pesonen, President and CEO of UPM-Kymmene Corporation, as its Chairman in its meeting on 25 January 2012. The Board elected Mikko Puk-kinen, Director General of the Confederation of Finnish Indus-tries EK and Lauri Lyly, President of the Central Organisation of Finnish Trade Unions (SAK) as its Deputy Chairmen. Puk-kinen functioned as the Deputy Chairman until 9 November 2012, when he departed from the Board. Jyri Häkämies was selected as the new Deputy Chairman. Lauri Lyly is the pri-mary Deputy Chairman. The Chairman and Deputy Chairmen also function as the Board’s Nomination and Compensation Committee.

The members of the Audit Committee, selected on 25 Janu-ary 2012, are Kristian Pullola (Chairman), Leila Kostiainen and Hannu Rautiainen.

In its meeting on 15 November 2012, Ilmarinen’s Supervi-sory Board also elected the members of the Election Commit-tee. The term of the Election Committee began immediately and will end following the final Supervisory Board meeting in 2013.


13

Matti Lievonen functioned as the Chairman of the Election Committee and Esa Vilkuna as the Deputy Chairman. The other Election Board members are Sture Fjäder, Antti Herlin, Leila Kostiainen and Jussi Pesonen. Of the six members of the Election Committee, half are individuals nominated by repre-sentatives of policyholders on the Supervisory Board, and the other half are individuals nominated by representatives of the insured on the Supervisory Board.

Ilmarinen presents, in connection with the financial state-ments and the Report on Operations, a separate corporate gov-ernance statement.

Ilmarinen’s auditor is Ernst & Young Oy, with Tomi Englund, APA, as the principal auditor.

Hannamari Mäntyvaara, Master of Laws, was selected as Ilmarinen’s Compliance Officer. She took up her position at Ilmarinen as of 29 October 2012. The Compliance Officer’s task is to supervise the legality of operations and to ensure and monitor compliance with external and internal rules related to the operations. The key task of the Compliance function is to ensure the smooth functioning and sufficiency of reliable gov-ernance and internal control as well as to support the business management and Board in these matters.

14. groupIn addition to the Ilmarinen parent company, Ilmarinen Group mainly includes real estate companies. Based on voting rights, TietoIlmarinen belongs to Ilmarinen Group as Ilmarinen’s ownership of TietoIlmarinen’s shares gives it control of 70 per cent of the votes, although Ilmarinen only owns 30 per cent of the share capital. The number of subsidiaries on 31 December 2012 was 168.Garantia Insurance Company Ltd, Kruunuvu-oren Satama Oy and Russia Invest B.V. are Ilmarinen’s associ-ated companies.

Suomi Mutual Life Assurance Company is Ilmarinen’s par-ticipating interest. Ilmarinen owns the guarantee capital of this company in full.

15. EvEnts aFtEr thE Financial yEar The international assessment of the Finnish earnings-related pension system commissioned by the Finnish Centre for Pen-sions was published in Helsinki on 7 January 2013. The assess-ment was carried out by the esteemed pension economists Professor Nicholas Barr of the London School of Economics and Professor Keith Ambachtsheer of the University of Toronto. Barr studied the pension system and its sustainability while Ambachtsheer focussed on the economic efficiency of the present decentralised system.

The overall views of both professors concerning the Finnish pension system were very positive. According to them, the Finnish pension system can be considered one of the best or even the best in the world. This results from the comprehensive cover, flexibility and sustainability of the earnings-related pen-sion system: in Finland the basis of pension cover is the same for everyone, all work accrues pension and the pension follows the employee when he or she changes jobs. A coherent and

comprehensive system improves the functionality of the labour markets when the employee’s pension security is not tied to the employer, unlike in many other countries.

The assessment, however, points out that Finland would be wise to be prepared for the gradual increase in the age limits of the pension system and to think about ways to improve the cost efficiency of its pension insurance companies. Professor Ambachtsheer also suggested strongly increasing the share weight in investment operations.

16. FuturE prospEcts The assessment of the need for pension reform, carried out by the working group led by Director General Jukka Pekkarinen will be completed during 2013. The working group’s report will invigorate the public debate concerning pensions, while simul-taneously creating a foundation for the negotiations to be held concerning the pension reform planned for 2017.

The weak economic outlook may cause employment figures to drop during 2013. The resulting muted development of pay-roll and unchanged pension contributions will be likely to slow down the growth of pension institutions’ premium income in 2013.

The investment environment will probably remain challeng-ing despite the fact that stock prices rose dramatically towards the end of 2012. The extremely low interest rate level will, in future, weaken the return on fixed-income investments. The possible prolongation of the downturn in the eurozone and possible setbacks in the management of the EU debt crisis may also unsettle market confidence.

In this challenging environment, Ilmarinen wishes to ensure its competitiveness. The company’s key competitive assets, alongside the continuous development of its own operations, include the partnership with OP-Pohjola Group which has a nationwide service network and an extensive selection of finan-cial services.

Ilmarinen will systematically pursue its adopted strategy. Ilmarinen’s objectives according to the strategy are to increase its premiums written through new customer accounts, to improve its cost efficiency and to achieve success as an investor of pension assets.

Mutual Insurance Company Pension Fennia and mutual pension company LähiTapiola have announced their merger in early 2014. As a result of the merger, a third major earnings-related pension company will emerge in the sector, which will be likely to increase competition in the field. Ilmarinen is con-fident in its attitude towards the added competition.

ILMARINEN IN 2012 Financial statements

14

parEnt company group

Eur million 2012 2011 2012 2011

tEchnical account

premiums written 4,019.3 3,725.5 4,019.3 3,725.5

investment income 9,488.6 10,864.7 9,466.9 10,842.2

claims incurred

Claims paid -3,881.8 -3,597.6 -3,881.4 -3,597.3

Change in provision for claims outstanding

Total change -625.3 -973.8 -625.3 -973.8

Porfolio transfers 40.6 32.9 40.6 32.9

-584.7 -940.8 -584.7 -940.8

-4,466.5 -4,538.4 -4,466.1 -4,538.2

change in provision for unearned premiums

Total change -755.1 1,425.7 -755.1 1,425.7

Porfolio transfers 66.1 15.5 66.1 15.5

-689.0 1,441.2 -689.0 1,441.2

operating expenses -88.1 -82.0 -87.3 -81.7

investment charges -8,255.2 -11,398.0 -8,236.1 -11,383.6

Balance on technical account 9.1 13.1 7.7 5.4

non-tEchnical account

Balance on technical account 9.1 13.1 7.7 5.4

other income 0.6 0.8 1.1 2.3

other expenses -1.0 -1.2 -1.0 -1.2

income taxes on ordinary activities -5.5 -6.8 -5.9 -7.3

profit/loss on ordinary activities 3.3 5.9 2.0 -0.7

appropriations

Change in depreciation difference -0.2 -0.1 - -

-0.2 -0.1 - -

minority interest - - 1.6 -0.4

profit/loss for the financial year 3.0 5.8 3.6 -1.0

PROFIT AND LOSS ACCOUNT


15

BALANCE SHEETparEnt company group

Eur million 2012 2011 2012 2011

assEts

intangible assets

Intangible rights 5.4 2.3 5.4 2.3

Prepayments 8.3 11.1 6.4 9.6

13.8 13.4 11.9 11.8

investments

Real estate

Real estate and real estate shares 1,295.5 1,282.7 2,156.6 2,040.0

Loans to group companies 911.9 788.2 - -

Loans to participating interests 13.2 14.0 13.2 14.0

2,220.6 2,084.9 2,169.8 2,054.0

Investments in group companies and participating interests

Shares and participations in group companies 0.2 0.2 - -

Shares and participations in participating interests 45.1 32.1 45.2 31.3

Loans to participating interests 184.6 192.0 184.6 192.0

229.9 224.3 229.8 223.3

Other investments

Shares and participations 11,605.5 12,009.7 11,605.5 12,009.7

Money market instruments 8,522.2 7,801.0 8,522.2 7,801.0

Loans quaranteed by mortgages 699.9 901.7 699.9 901.7

Other loans 1,449.2 1,680.2 1,449.2 1,680.2

Deposits - - - 3.7

22,276.8 22,392.6 22,276.8 22,396.3

24,727.3 24,701.7 24,676.4 24,673.5

receivables

Direct insurance operations

Policyholders 170.6 142.7 170.6 142.7

Other receivables 2,728.0 1,989.5 2,710.4 1,954.3

2,898.6 2,132.2 2,881.0 2,097.0

other assets

Tangible assets

Furniture and fixtures 1.0 1.2 1.0 1.2

Other tangible assets 1.7 1.7 1.7 1.7

2.8 2.9 2.8 2.9

Cash at bank and in hand 905.5 247.1 910.9 248.4

908.3 250.0 913.6 251.3

prepayments and accrued income

Accrued interests and rent 167.9 207.0 168.8 207.3

Other prepayments and accrued income 50.1 53.0 49.5 53.5

218.1 260.0 218.3 260.8

total assets 28,766.0 27,357.4 28,701.2 27,294.6


16


Eur million 2012 2011 2012 2011

liaBilitiEs

capital and reserves

Initial fund 23.0 23.0 23.0 23.0

Other reserves

Funds and reserves under the Articles of Association 60.2 54.5 60.2 54.5

Other reserves - - 0.6 0.6

60.2 54.5 60.8 55.1

Profit/loss brought forward - - -58.8 -52.0

Profit/loss for the financial year 3.0 5.8 3.6 -1.0

86.3 83.3 28.6 25.0

minority interest - - 15.5 19.3

accumulated appropriations

Depreciation difference 2.7 2.5 - -

2.7 2.5 - -

technical provisions

Provision for unearned premiums 13,795.8 13,040.7 13,795.8 13,040.7

Provision for claims outstanding 11,790.0 11,164.7 11,790.0 11,164.7

25,585.9 24,205.5 25,585.9 24,205.5

liabilities

Direct insurance operations 21.5 16.8 21.5 16.8

Other liabilities 2,688.3 2,618.5 2,667.9 2,596.7

2,709.8 2,635.3 2,689.4 2,613.5

accruals and deferred income 381.3 430.9 381.8 431.3

total liabilities 28,766.0 27,357.4 28,701.2 27,294.6


17

CASH FLOw STATEMENTparEnt company group

Eur million 2012 2011 2012 2011

cash flow from operations

Profit /loss on ordinary activities 3.3 5.9 2.0 -0.7

Adjustments

Change in technical provisions 1,380.4 -451.9 1,380.4 -451.9

Impairments and revaluations on investments 447.4 1,468.7 439.6 1,464.7

Planned depreciations 12.6 12.1 63.8 61.4

Other adjustments -833.0 -172.7 -832.7 -172.3

Cash flow before change in working capital 1,010.7 862.0 1,053.1 901.2

Change in working capital

Short-term non-interest-bearing receivables increase (-)/decrease (+) -724.5 -243.0 -741.4 -239.8

Short-term non-interest-bearing liabilities increase (-)/decrease (+) 25.0 534.5 26.5 546.2

Cash flow from operations before financial items and taxes 311.2 1,153.5 338.1 1,207.6

Direct taxes paid -5.5 -6.8 -5.9 -7.3

Cash flow before exceptional items 305.8 1,146.7 332.2 1,200.3

cash flow from operations 305.8 1,146.7 332.2 1,200.3

cash flow from investments

Asset purchase (exl. financial assets) -16,325.5 -18,377.1 -16,333.2 -18,368.5

Capital gains on investments (exl. financial assets) 16,679.9 17,226.2 16,664.8 17,163.8

Investments and capital gains (net) on intangible, tangible and other assets -1.7 -6.1 -1.4 -5.4

cash flow from investments 352.7 -1,157.1 330.3 -1,210.1

cash flow from financing

Interests paid on quarantee capital and other profit distribution 0.0 -1.4 0.0 -1.4

Repayment of guarantee capital - -23.9 - -23.9

cash flow from financing 0.0 -25.4 0.0 -25.4

change in financial resources 658.4 -35.7 662.5 -35.2

Financial resources at the start of the financial year 247.1 282.8 248.4 283.6

Financial resources at the end of the financial year 905.5 247.1 910.9 248.4

ILMARINEN IN 2012 Notes to the accounts

18

ACCOUNTING PRINCIPLESIlmarinen’s financial statements are prepared in accordance with the Accounting Act, the Companies Act, the Insurance Companies Act, and the Act on Employment Pension Insur-ance Companies. Ilmarinen’s financial statements also comply with the Ministry of Social Affairs and Health’s decree on the financial statements of insurance companies and related con-solidated financial statements, the calculation principles and regulations approved by the Ministry of Social Affairs and Health, and with the regulations and guidelines of the Insur-ance Supervision Authority.

Consolidated financial statementsThe consolidated financial statements cover the parent com-pany and all subsidiaries in which the parent company, directly or indirectly, controls more than one-half of the voting rights. With the exception of the subsidiary that provides IT services for Ilmarinen, the company’s subsidiaries are real estate com-panies.

The consolidated financial statements are drawn up by com-bining the income statements, balance sheets and notes of the parent company with those of its subsidiaries and eliminating inter-company receivables and payables, revenues and expenses, profit distributions and equity ownerships. Subsidiar-ies acquired during the year are consolidated as of their acqui-sition date, and companies sold during the year are consoli-dated up to their date of sale. Minority interests are segregated from net income and from capital and reserves.

Inter-company equity ownership is eliminated, based on the purchase method. Consolidation goodwill is allocated to the assets of subsidiaries and expensed in accordance with their respective amortisation schedules.

Impairments, related reversals and write-ups relating to real estate subsidiary shares have been reversed in the consolidated financial statements. In the consolidated balance sheet, the cor-responding entries are allocated to the real estate holdings of subsidiaries at fair value.

Associated undertakings, i.e. undertakings in which the Ilmarinen Group holds 20 per cent to 50 per cent of the voting rights, are included in the consolidated financial statements using the equity method.

Ownership interests of 20–50 per cent in housing companies and real estate companies are not consolidated. The effect of this on consolidated net income and distributable reserves is not significant.

The consolidated income statement includes the Group’s equity in the income of associated undertakings. In the con-solidated balance sheet, the Group’s share of an associated undertaking’s cumulative income since acquisition is added to or deducted from the cost of the associated undertaking.

Book value of investmentsBuildings and structures are shown in the balance sheet at the lower of cost less scheduled depreciation or fair value. The acquisition cost includes purchase-related variable costs. Shares in real estate entities and land and water areas are

shown in the balance sheet at the lower of cost or fair value. The values of some real estate investments have been written up in previous years. Scheduled depreciation is also deducted from the written-up portion of buildings, if recognised as income.

Other shares and equity interests classified as investment assets are shown in the balance sheet at the lower of cost or fair value. The book value of some shares has been written up in previous years.

Debt securities are reported at the lower of cost or market. However, any changes in value caused by fluctuations in inter-est rates are not recognised. The difference between the amount repayable at maturity and the acquisition cost of debt securities is recognised as interest income or deducted from interest income over the remaining life of instruments. The offsetting entry is an increase or a decrease in the cost of the instrument in question.

The acquisition cost is based on asset class averages.Shares and equity interests regarded as fixed assets are

reported in the balance sheet at cost less permanent value impairments. The cost basis of assets is calculated using the FIFO method.

Investments regarded as receivables are reported in the bal-ance sheet at the lower of nominal value or current value.

Previously recorded impairments on investments are reversed through the income statement in cases where the current value of investments has risen.

Equity, fixed-income, credit risk, raw material and currency derivatives were used during the accounting period. Hedging accounting is applied to derivatives only in the case of currency swaps, although some of the other derivatives transactions also function as effective hedging. Some of the currency derivatives that constituted effective hedges at the balance sheet date are treated as risk-mitigating hedges for solvency and coverage cal-culation purposes. Derivative financial instruments are recog-nised in the balance sheet at the lower of cost or fair value, separately for each instrument or as instrument entities if the individual instruments have been defined to belong to the same derivative strategy. Any income/losses on closed and mature derivatives and on derivatives whose change in value has been paid or received during the maturity (e.g. futures), have been recognized in full.

Liabilities resulting from derivative contracts and securities given as collateral in derivatives trading and received securities not included in the balance sheet have been listed in the notes to the financial statements. In a transfer according to the Act on Financial Collateral Arrangements, the security received in cash is recognised as a liability and the cash provided as secu-rity is recognised as an asset.

Information concerning the securities borrowed and the assets pledged as security for lending is presented in the notes to the financial statements. Short-sold securities are entered in the balance sheet as current liabilities in the amount of the higher of the sales price or the market price on the balance sheet date.


19

Book value of non-investment assetsIntangible assets and equipment are reported in the balance sheet at cost less accumulated scheduled depreciation and amortisation. The acquisition cost includes purchase- and manufacturing-related variable costs.

Contribution receivable and other receivables are recognized in the balance sheet at the lower of nominal value or their likely realisable value.

Scheduled depreciationDepreciation follows a predefined depreciation schedule. Scheduled depreciation on buildings and structures is calcu-lated on the cost of individual buildings and on recognised write-ups. Depreciation is based on the estimated useful life of buildings and the straight-line method. Depreciation periods for new buildings and structures are as follows:

Residential and office buildings 50 yearsHotels, commercial and industrial properties 40 yearsBuilding components 10 yearsOther assets Business Taxation ActWrite-ups same as buildings

A 20% salvage value has been fixed for some buildings and structures.

Scheduled amortisation on intangible assets and equipment has been calculated on the mean cost of specified groups of assets. Amortisation is based on the estimated useful life of asset groups and the straight-line method.

The amortisation periods are as follows: Intangible rights (user licences for software) 5–10 yearsOther capitalised expenditures 5 yearsVehicles and computer hardware 5 yearsOther equipment 10 years

Write-ups of investmentsThe book values of land and water areas, buildings and securi-ties can be written up. Write-ups of assets classified as invest-ments are recognised in the income statement, and write-ups of items classified as fixed assets are entered in the revaluation reserve. If a write-up proves unfounded, a related loss is recog-nised in the income statement or the revaluation reserve is adjusted accordingly.

Write-ups on buildings are expensed in accordance with the applicable depreciation schedule.

Current value of investments and measurement differencesThe notes to the financial statements itemise the remaining acquisition cost, book value and current value of investments and derivatives reported in the balance sheet. The difference between the first two values above consists of write-ups of investments. The difference between the last two values above indicates measurement differences that are unrecognised in the balance sheet.

The current value of real estate investments has been defined on a property-by-property basis, primarily utilising the income approach. The market value method, based on regional market

price statistics, has also been used to supplement this approach. Valuations also consider the purpose and condition, together with existing lease agreements and the current level of market rents. External real estate valuers and the company’s own experts participate in the annual determination of the current value of real estate investments.

The year’s last bid quotation, or in the absence of this the last trading price, is used as the current value of listed shares. The last available fund unit value reported by the management company is taken as the market value of investment fund units. Private equity funds are valued at the management company’s estimate of current value or, if unavailable, at acquisition cost.

The current value of other shares and equity interests is their remaining cost basis, likely realisable value, or net asset value.

The current value of debt securities is primarily based on market prices. If no market price is available or the investment’s current value cannot be reliably determined, valuations by external parties are used or the current value is calculated using commonly accepted calculation models for market prices or the purchase price is used as the current value.

The current value of derivative financial instruments is gen-erally the market price or the likely realisable value estimated by the counterparty. A more detailed description of the method of determining the current value of derivatives is presented in the notes to the financial statements in the section “Off-balance sheet guarantee engagements and liabilities”.

Receivables are valued at the lower of nominal value or net realisable value.

Technical provisionsThe liability resulting from insurance contracts is reported in the balance sheet under technical provisions. It consists of provisions for unearned premiums and claims outstanding. The provision for unearned premiums relates to the company’s future liability for pension contingencies, and the provision for claims outstanding relates to its liability for pensions already being paid out.

The technical provisions have been calculated using the cal-culation principles approved by the Ministry of Social Affairs and Health.

The provision for unearned premiums comprises a provision for future bonuses, which is counted in the solvency capital, and a provision for current bonuses, which includes the amount intended for distribution as contribution discounts to policy-holders. As of 2007, the provision for unearned premiums con-tains an equity linked buffer, which depends on the average return of the share investments of pension institutions. The share in technical provisions tied to return on shares is ten per cent.

The provision for claims outstanding also incorporates an equalisation provision, the purpose of which is to balance ran-dom fluctuations during years where contributions fail to meet total payouts.

Profit for the period and capital and reservesThe calculation principles confirmed by the Ministry of Social Affairs and Health specify the allocation of pension insurance companies’ earnings between changes in the equalisation provi-


20

sion, provisions for future and current bonuses, and reported net income.

The notes to the financial statements include details on the distribution of the company’s capital and reserves among the owners of the guarantee capital and the policyholders, and the calculation of distributable profits. Following the repayment of the guarantee capital during 2011, all of the company’s assets that exceed its liabilities belong to the policyholders as part of the insurance portfolio.

Solvency capitalFinancial supervision monitors the solvency of insurance com-panies. One of the main indicators used is the solvency capital, which refers to the difference between assets and liabilities at current value. Technical provisions do not include provision for future bonuses in this context, which provides a buffer against investment risks. In addition, based on the temporary legisla-tion, part of the provision for pooled claims included in techni-cal provisions is treated equal to solvency capital in 2008–2012. The solvency capital and reserves have to meet the require-ments laid down in the Act on Employment Pension Insurance Companies.

The solvency capital is presented in the notes to the financial statements.

Any change in the difference between current and book val-ues compared to the previous year, i.e. change in valuation differences, forms part of the overall result for the financial year and is shown as a change in solvency capital.

Deferred tax liabilities and assetsTaxes for the accounting period and previous accounting peri-ods are recognised in the income statement on an accrual basis.

Discretionary provisions and accelerated depreciation and amortisation are included in capital and reserves in the con-solidated balance sheet, after deduction for minority interest; changes in these items are included in the reported consoli-dated net income for the accounting period.

Ilmarinen does not include deferred tax liabilities and assets in the parent company’s balance sheet or in the consolidated balance sheet, and does not deduct deferred tax liabilities from the company’s solvency capital because the realisation of these liabilities and receivables cannot be considered likely in relation to the financial statements or consolidated financial statements of an insurance company engaged in the statutory earnings-related pension insurance business.

Foreign currency-denominated itemsTransactions in foreign currencies have been recognised at the rate quoted on the day of the transaction. Receivables and liabilities denominated in foreign currencies that are not settled at the end of the accounting period and the current values of investments are translated into Finnish currency using the reference exchange rates published by the European Central Bank on the balance sheet date. Foreign exchange gains or losses arising during the accounting period and at year-end are recognised as adjustments to related income and charges, or as investment income and charges if such gains or losses pertain to financing transactions.

Function-specific operating expenses and depreciation and amortisation expensesOperating expenses and depreciation and amortisation expenses on equipment and capitalised expenditures are reported as function-specific items in the income statement. Expenses related to claims administration and the maintenance of employees’ capacity for work are included in claims paid, and expenses related to investment management are treated as investment expenses. Only expenses related to the origination and administration of policies and administrative overhead charges are presented as operating expenses. The statutory fees are included in administration costs. Expenses incurred in other activities are defined as other expenses. Scheduled depre-ciation on buildings is reported as an investment expense.

Staff pension arrangementsThe pension insurance of personnel and members of the Board of Directors and the Supervisory Board is covered through TyEL insurance. It has been supplemented with voluntary additional insurances. The management’s pension arrange-ments are explained in the notes. Pensions paid during the year under review have been paid on an accrual basis.

Key figures and analysesAll key figures and analyses concerning the company’s financial performance are calculated and presented in accordance with regulations issued by the Insurance Supervision Authority regarding notes to the financial statements.

In the case of investment operations and solvency, key figures and analyses are given at current values.

The ratio of net income from investments at current value to capital employed is calculated separately for each type and also on the total investment portfolio, taking into account the weighting of cash flows on a daily or monthly basis. The mod-ified Dietz formula is used for calculation purposes, where the capital employed is calculated by taking the market value at the start of the period and adding to it each period’s cash flows, weighted by the relative time remaining from the transaction date or middle of the transaction month to the end of the period.


21

NOTES TO PROFIT AND LOSS ACCOUNT AND BALANCE SHEETEur million 2012 2011

spEciFication Fo prEmiums WrittEn

Direct insurance

TyEL basic coverage

Employer contribution 2,850.2 2,712.0

Employee contribution 909.8 780.3

3,760.1 3,492.3

TyEL supplementary coverage 3.3 3.4

YEL minimum coverage 286.5 257.2

4,049.8 3,752.9

Transition contribution to the State Pension Fund -29.9 -25.7

Reinsurance 0.0 0.0

premiums written before reinsurers' share 4,020.0 3,727.2

Reinsurers' share -0.7 -1.7

premiums written 4,019.3 3,725.5

Items deducted from premiums written

Credit loss on outstandig premiums

TyEL -12.7 -13.1

YEL -2.5 -2.5

-15.2 -15.6

spEciFication oF claims paid, parEnt company

Direct insurance

Paid to pensioners

TyEL basic coverage 3,472.7 3,202.7

TEL supplementary coverage 60.6 59.5

YEL minimum coverage 311.9 289.3

YEL supplementary coverage 1.5 1.5

3,846.8 3,553.0

Payments to/refunds from the provision for clearing PAYG pensions

TyEL pensions 153.4 190.3

YEL pensions -15.5 -14.2

Share of the unemployment insurance fund insurance contrbution and division of the costs of pension compoments accrued on the basis of unsalaried periods -127.4 -142.9

YEL government share -8.6 -17.0

State compensation pursuant to VEKL -0.2 -0.1

1.6 15.9

3,848.4 3,568.9

Reinsurance 0.0 0.0

Claims handling expenses 28.9 25.1

Working capacity maintenance costs 5.1 5.2

claims before reinsures' share 3,882.5 3,599.2

Reinsures' share -0.7 -1.6

total claims paid 3,881.8 3,597.6


22


Eur million 2012 2011 2012 2011

spEciFication oF nEt invEstmEnt incomE

investment income

income from group companies

Dividend income 0.4 0.4 - -

0.4 0.4 - -

income from participating interests

Share of the profit/loss of associated companies - - 1.2 2.9

Dividend income form other participating interests 0.6 1.3 0.3 0.5

Interest income from other participating interests 6.0 6.2 6.0 6.2

6.7 7.5 7.6 9.7

income from investments in real estate

Interest income

From group companies 25.2 21.9 - -

From other than group companies 2.6 2.7 3.0 2.7

Other income

From group companies 1.4 1.4 - -

From other than group companies 200.0 187.8 205.8 193.2

229.2 213.8 208.8 195.9

income from other investments

Dividend income from other than group companies 307.2 331.0 307.2 331.0

Interest income from group companies 0.6 6.5 - -

Interest income from other than group companies 325.3 443.3 325.3 443.3

Other income from other than group companies 936.2 958.1 936.2 958.1

1,569.3 1,738.9 1,568.7 1,732.4

total 1,805.6 1,960.7 1,785.1 1,938.0

value readjustments 322.9 128.2 321.7 128.4

capital gains 7,360.0 8,775.8 7,360.2 8,775.8

total 9,488.6 10,864.7 9,466.9 10,842.2

investment charges

charges on real estate investments -125.2 -122.2 -65.2 -63.4

charges on other investments -781.1 -1,043.1 -781.0 -1,043.1

interest charges and other charges on liabilities

To group companies -1.0 -1.0 - -

To other than group companies -44.8 -27.9 -44.8 -27.9

-45.8 -28.9 -44.8 -27.9

total -952.1 -1,194.2 -891.0 -1,134.4

value adjustments and depreciation

Value adjustments -770.3 -1,596.9 -761.3 -1,593.0

Planned depreciation on buildings -11.1 -10.6 -62.3 -59.9

-781.5 -1,607.5 -823.5 -1,652.9

capital loss -6,521.6 -8,596.3 -6,521.6 -8,596.3

total -8,255.2 -11,398.0 -8,236.1 -11,383.6

net investment income before revaluations and their adjustments 1,233.4 -533.2 1,230.8 -541.4

net investment income in the profit and loss account 1,233.4 -533.2 1,230.8 -541.4


23


Eur million 2012 2011 2012 2011

spEciFication oF opErating ExpEnsEs

total operating expenses by activity

claims paid

Claims handling expenses 28.9 25.1 28.5 24.9

Working capacity maintenance costs 5.1 5.2 5.1 5.2

34.1 30.3 33.7 30.1

operating expenses

Acquisition costs:

Commissions, direct insurance 1.0 0.8 1.0 0.8

Other policy acquisition costs 20.5 15.8 20.3 15.8

21.5 16.6 21.4 16.5

Portfolio administration expenses 41.7 36.4 41.0 36.2

Administrative expenses;

Statutory charges:

Cost compoment of the Finnish Pension Centre 7.9 10.9 7.9 10.9

Judicial administration charge 0.8 0.8 0.8 0.8

Supervision charge of the Insurance Supervisory Authory 0.6 0.7 0.6 0.7

9.3 12.3 9.3 12.3

Other administrative expenses 15.6 16.7 15.6 16.6

88.1 82.0 87.3 81.7

investment charges

Costs on real estate investment 2.5 1.9 2.4 1.9

Other 18.4 15.5 18.3 15.5

20.9 17.4 20.7 17.4

other expenses 1.0 1.2 1.0 1.2

total operating expenses 144.0 130.9 142.6 130.3

spEciFication oF staFF ExpEnsEs and mEmBErs oF corpratE organs

staff expenses

Salaries and bonuses 34.5 34.2 39.1 38.7

Pension expenditure 7.0 7.0 7.9 7.9

Other social security expenses 1.8 2.1 2.1 2.3

Change in reserves *) 4.3 -0.5 4.3 -0.6

total 47.5 42.7 53.4 48.3

salaries, bonuses and fringe benefits paid to management

Managing director and deputies 1.1 1.2 1.2 1.3

Board members and deputy members 0.4 0.4 0.4 0.4

Members of Supervisory Board and deputy members 0.1 0.1 0.1 0.1

total 1.6 1.7 1.7 1.8

pension commitments for the benefit of the executive management

The retirement age of Ilmarinen’s President and CEO and Deputy CEO is 62 years. On 19 December 2012, the Board of Directors and the President and CEO agreed that the President and CEO’s employment relationship will continue until the spring of 2015, when the President and CEO turns 63. The President and CEO and his Deputy are covered by voluntary defined-benefit supplementary pension insurance. The President and CEO’s supplementary pension accrual ends when he turns 62 on 12 December 2013. The total pension, which consists of the earnings-related pension and supplementary pension, is 60 per cent of the salary on which the supplementary pension is based. The salary on which the supplementary pension is based is calculated according to the annual earnings for the past five full years in the present employment relationship.

average staff number during the financial period 542 545 612 617

auditor's fee

Auditing 0.2 0.2 0.2 0.3

Tax advice 0.0 0.0 0.0 0.0

Other services 0.1 0.0 0.1 0.0

*) The change in reserves 2012 includes an adjustment for 2010–2011.


24

Eur million dec 31, 2012 dec 31, 2011

invEstmEnt

Fair valuE oF invEstmEnts and diFFErEncE BEtWEEn currEnt and BooK valuE, parEnt company

remaining acquisition

costBook value

Fair value

remaining acquisition

costBook value

Fair value

Investments in real estate

Real estate 425.4 425.4 642.2 428.7 428.7 621.7

Shares in group companies 815.6 819.8 1,318.0 830.0 834.2 1,276.1

Shares in participating interests 43.9 43.9 53.1 13.1 13.1 19.0

Other shares in real estate 6.3 6.3 7.8 6.8 6.8 7.2

Loans to group companies 911.9 911.9 911.9 788.2 788.2 788.2

Loans to participating interests 13.2 13.2 13.2 14.0 14.0 14.0

Investments in group companies

Shares and participations 0.2 0.2 0.2 0.2 0.2 0.2

Investments in participating interests

Shares and participations 45.1 45.1 45.9 32.1 32.1 32.1

Loan receivables 184.6 184.6 184.6 192.0 192.0 192.0

Other investments

Shares and participations 11,605.1 11,605.5 13,584.8 12,009.4 12,009.7 13,278.1

Money market instruments 8,522.2 8,522.2 8,780.7 7,801.0 7,801.0 7,847.8

Loans guaranteed by mortgages 699.9 699.9 699.9 901.7 901.7 901.7

Other loan receivables 1,449.2 1,449.2 1,449.2 1,680.2 1,680.2 1,680.2

24,722.7 24,727.3 27,691.4 24,697.2 24,701.7 26,658.2

Remaining acquisition cost of money market instruments includes:

the difference between the nominal value andacquisition cost, released to interest income (+)or charged to interest income (-) -51.0 -21.0

Book value comprises

Revaluations entered as income 4.6 4.6

difference between current and book value 2,964.2 1,956.5

Fair valuE oF dErivativEs and valuation diFFErEncE, parEnt company Book value Fair value Book value Fair value

Fair value of non-hedging derivatives and valuation items

Other receivables

Price diffefence of derivatives 20.8 0.0 56.6 0.0

Prepayments for option contracts 1,432.2 2,109.8 1,161.9 2,043.4

Other debts

Price diffefence of derivatives -47.2 0.0 -66.7 0.0

Prepayments for option contracts -315.5 -233.0 -512.1 -457.1

Other prepayments and debts

Future and forward contracts and total return swaps -311.9 133.4 -237.3 238.4

778.5 2,010.3 402.4 1,824.8

difference between current and book value 1,231.9 1,422.4


25

sharEs and participations, parEnt company, 31 dEc 2012 number of shares

percentage ofshares/votes

Book valueEur million

Fair value Eur million

sharEs in group companiEs

TietoIlmarinen Oy 1,530 30.00/70.00 0.2 0.2

total 0.2 0.2

participanting intErEsts

Garantia Insurance Company 15,777 26.30/26.30 7.3 7.3

Kruunuvuoren Satama Oy 330 33.00/33.00 37.2 38.0

Russia Invest B.V 54,450 27.23/27.23 0.1 0.1

Suomi Mutual Life Assurance Company 3 100.00/0.00 0.5 0.5

total 45.1 45.9

othEr invEstmEnts

shares and participations

domestic companies, listed

Affecto Plc 919,000 4.27 2.7 2.7

Ahlstrom Corporation 332,674 0.71 4.4 4.4

Alma Media Corporation 1,100,000 1.46 5.0 5.0

Amer Sports Corporation 4,173,564 3.52 35.8 46.8

Aspo Plc 1,288,601 4.16 8.2 8.2

Atria Plc 90,000 0.32/0.08 0.6 0.6

Basware Corporation 1,471,407 11.38 26.5 29.8

Biotie Therapies Oyj 16,732,271 3.70 6.7 6.7

CapMan Plc 7,178,500 8.52/5.28 6.0 6.0

Cargotec Corporation 1,329,255 2.07/0.89 26.5 26.5

Citycon Corporation 29,344,735 8.98 75.4 75.4

Comptel Corporation 2,736,368 2.56 1.1 1.1

Cramo Plc 346,931 0.83 2.7 2.7

Digia Plc 1,000,000 4.79 2.6 2.6

Elisa Corporation 4,805,522 2.87 73.0 80.3

Exel Composites Plc 689,400 5.79 2.3 4.0

F-Secure Corporation 8,839,432 5.57 13.6 13.6

Finnair Plc 2,025,564 1.58 4.8 4.8

Finnlines Plc 4,953,667 10.58 38.6 38.6

Fiskars Corporation 1,675,871 2.04 21.0 27.9

Fortum Corporation 12,115,079 1.43 171.3 171.3

HKScan Corporation 218,298 0.40/0.14 0.8 0.8

Huhtamäki Oyj 2,838,832 2.65 32.9 34.8

Ilkka-Yhtymä Oyj 606,397 2.36/2.37 2.7 3.1

Kemira Oyj 6,450,143 4.15 73.9 75.9

Kesko Corporation 2,809,777 2.85/1.41 69.3 69.3

Kone Corporation 2,680,910 1.03/0.44 87.5 149.6

Konecranes Plc 2,174,664 3.44 48.7 55.5

Lassila & Tikanoja Plc 1,547,803 3.99 18.0 18.0

Lemminkäinen Corporation 345,869 1.76 4.9 4.9

Lännen Tehtaat plc 53,800 0.85 0.6 0.8

Marimekko Corporation 265,419 3.28 2.9 3.8

Martela Oyj 335,400 8.07/2.14 1.7 1.7

Metso Corporation 3,756,964 2.50 111.1 120.3

Metsä Board Corporation 13,347,625 4.07/7.90 29.4 29.4

Neste Oil Corporation 6,051,486 2.36 59.1 59.1

Nokia Corporation 71,219,299 1.90 187.9 208.4

Nokian Tyres plc 3,789,890 2.87 111.3 113.9

Okmetic Oyj 1,549,985 8.97 6.6 7.8

Olvi plc 779,026 3.75/0.85 4.8 15.2

Oral Hammaslääkärit Plc 450,000 5.15 1.4 1.4

Oriola-KD Corporation 5,145,792 3.40/4.96 9.3 11.5

Orion Corporation 3,084,537 2.18/4.16 41.7 67.9

Outokumpu Oyj 80,153,368 3.86 63.6 63.6


26

sharEs and participations, parEnt company, 31 dEc 2012 number of shares

percentage ofshares/votes

Book valueEur million

Fair value Eur million

Outotec Oyj 2,440,935 5.33 65.8 103.4

PKC Group Oyj 2,202,923 10.23 19.7 34.0

Pohjola Bank plc 31,955,142 10.00/5.42 239.9 358.2

Ponsse Plc 392,666 1.40 2.3 2.3

Pöyry Plc 5,426,977 9.08 15.9 15.9

Raisio plc 5,452,178 3.30/0.67 13.5 16.7

Ramirent Plc 3,295,154 3.03 20.5 20.5

Rapala VMC Corporation 883,899 2.24 4.3 4.3

Rautaruukki Corporation 1,332,210 0.95 7.9 7.9

Sampo plc 5,595,367 1.00/0.99 110.7 136.1

Sanoma Corporation 4,032,220 2.48 29.9 29.9

Sievi Capital Oyj 580,000 0.96 0.5 0.5

Siili Solutions Plc 71,000 4.54 0.5 0.5

Sponda Plc 27,052,730 9.56 78.4 97.4

SRV Group Plc 308,003 0.84 1.0 1.0

Stockmann plc 860,269 1.19/0.74 11.8 11.8

Stonesoft Corporation 724,900 1.14 1.0 1.0

Stora Enso Oyj 13,512,490 1.71/1.89 72.1 72.1

Suominen Corporation 26,422,103 10.74 9.2 9.2

Talentum Oyj 4,308,383 9.73 5.0 5.0

Talvivaara Minig Company Plc 16,751,914 6.15 20.8 20.8

Technopolis Plc 7,921,177 10.48 26.4 29.9

Teleste Corporation 953,854 5.09 3.9 3.9

Tieto Corporation 2,697,859 3.73 36.9 40.2

Tikkurila Oyj 4,619,940 10.47 67.6 67.6

Tulikivi Corporation 1,902,380 5.12/1.55 1.0 1.0

UPM-Kymmene Corporation 10,961,980 2.08 96.5 96.5

Uponor Corporation 1,402,052 1.92 13.5 13.5

Vacon Plc 858,968 5.62 22.7 34.5

Vaisala Corporation 660,000 3.62/0.80 10.5 10.5

Wärtsilä Corporation 3,909,525 1.98 79.8 127.6

YIT Corporation 3,774,568 2.97 42.7 55.7

Other 3,119,266 1.2 1.2

total 2,632.2 3,106.3

domestic companies, non-listed

Aloitusrahasto Vera Oy 1,500 3.12 2.6 2.6

Arek Oy 2,520,000 18.00 2.5 2.5

DNA Ltd 424,689 4.42 40.3 40.3

EcoStream Oy 147,315 5.25 2.0 2.0

Ekokem Oy Ab 490,700 13.94 19.6 19.6

Enfo Oyj 11,202 1.90 0.8 0.9

Faron Pharmaceuticals Oy 40,384 2.78 1.0 1.0

Fingrid Oyj 661 19.88/17.15 135.7 222.0

GreenStream Network Plc 1,200,000 19.87 0.6 0.6

Holiday Club Resorts Oy 195,121 7.52 4.0 4.0

Keliber Oy 47,415 12.97 1.2 1.2

Mediverkko Yhtymä Oy 600,000 5.44 3.0 3.0

Osuuskunta KPY 761,900 13.73 12.1 12.1

PHP Holding Oy 3,568 1.76/0.22 3.7 3.7

Northern Power Company Ltd. 1,500,000 4.13 70.7 70.7

Porasto Oy 2,080 12.82 0.6 0.6

PRT-Forest Oy 6,000 10.02 3.6 3.6

SATO Corporation 8,135,145 15.95 30.2 105.8

SSP Yhtiöt Oy 1,093 1.14 0.6 0.6

Tornator Oy 375,000 7.50 6.0 31.0

VVO-group plc 1,332,330 18.00 36.2 78.1

Other 15,036,930 3.3 3.3

total 380.4 609.1


27

sharEs and participations, parEnt company, 31 dEc 2012

Book value,

Eur million

Fair value,

Eur million

othEr invEstmEnts

Foreign companies, listed

australia

PanAust Limited 4.0 4.7

austria

OMV AG 1.2 1.2

Belgium

KBC Bankverzekerings NPV 3.1 4.1

Bermuda

Höegh LNG Holdings Ltd. 3.2 3.3

Seadrill Ltd 2.9 2.9

denmark

A P Moller – Maersk A/S, s.B 6.3 6.3

Den Danske Bank A/S 2.9 3.1

Novo Nordisk A/S s.B 7.2 9.8

Estonia

Tallinna Vesi AS 0.7 0.7

France

Air Liquide SA 12.5 14.0

Alcatel-Lucent SA 17.1 17.1

Alstom S.A. 0.9 1.1

AXA SA 20.4 20.5

BNP Paribas SA 16.4 16.4

Bouygues SA 1.2 1.2

Carrefour 2.7 3.0

Compagnie de Saint-Gobain 9.8 9.8

Electricite De France 0.9 0.9

GDF Suez (Gaz de France) 5.8 5.8

Klepierre 5.2 6.6

Lafarge SA 3.5 5.2

Lagardere S.C.A. 10.0 11.1

Michelin 6.2 7.1

Pernod-Ricard SA 2.3 2.8

Publicis Groupe 2.2 2.9

Renault SA 2.4 2.4

Sanofi-Aventis SA 22.4 32.8

Schneider Electric SA 6.5 8.1

Societe Generale s.A 14.7 16.2

TotalFinaElf SA 28.9 28.9

Unibail-Rodamco SE 11.7 15.0

Vinci S. A. 4.5 4.5

Vivendi SA 21.8 25.5

Other 0.2 0.2

germany

Adidas AG 10.2 10.4

Allianz SE (Societas Europeae), registered shares 14.2 19.5

BASF SE 24.6 29.4

Bayer AG 11.6 19.1


Book value,

Eur million

Fair value,

Eur million

Bayerische Motoren Werke AG 3.5 7.7

Beiersdorf Ag 2.5 2.6

Celesio AG 6.6 6.6

Commerzbank Ag ordinary 6.1 6.1

Continental AG 1.1 1.6

Daimler Ag ordinary registered 10.5 13.0

Deutsche Bank Ag, registered shares 16.3 17.3

Deutsche Boerse Ag 2.1 2.1

Deutsche Post AG 10.7 13.9

Deutsche Telekom Ag, registered shares 9.7 9.9

E.On SE 9.1 9.1

GSW Immobilien AG 2.2 3.2

Heidelberger Zement AG 0.8 0.9

Lanxess AG 2.6 3.0

Linde AG 8.3 11.1

MAN SE 1.5 2.6

Metro AG 6.5 6.5

Münchener Rückversicherungs-Gesellschaft AG 8.4 10.8

Porsche Automobil Holding SE 2.3 2.3

Rhoen-Klinikum AG 3.9 4.1

RWE Ag 5.1 5.1

SAP Ag ordinary shares 31.9 45.6

Siemens AG 19.6 22.9

Thyssen Krupp Ag 4.0 4.2

Volkswagen AG 5.7 10.3

great Britain

Amlin PLC 2.2 2.8

Anglo American Plc 5.2 5.2

Antofagasta 0.8 0.8

Arm Holdings Plc 8.9 11.3

Astra Zeneca 14.1 14.4

Aviva Plc. 2.0 2.3

BAE Systems Plc 8.9 8.9

Barclays Plc 11.8 12.7

BG Group Plc ordinary 14.9 14.9

BHP Billiton Plc ordinary 24.3 26.2

BP P.l.c. ordinary UK listing 34.4 34.4

British American Tobacco p.l.c. 3.2 3.2

British Land Co ordinary 7.7 8.6

BT Group Plc 8.4 12.9

Centrica Plc 5.0 6.8

Compass Group Plc 2.4 5.4

Diageo Plc ordinary 3.1 6.2

GlaxoSmithKline Plc ordinary 29.2 29.2

Hammerson PLC 6.2 6.9

HSBC Holding Plc ordinary 35.6 47.1

Land Securities Group plc 10.6 12.0

Lloyds Banking Group plc 6.2 6.2

National Grid Plc. 9.8 11.3


28


Book value,

Eur million

Fair value,

Eur million

Pearson Plc ordinary 4.9 4.9

Prudential Corporation Plc ordinary 3.5 5.9

Reckitt Benckiser Group Plc 4.7 5.5

Rio Tinto Plc 16.6 20.5

Rolls-Royce Holdings Plc 5.4 10.8

Royal Dutch Shell Class A 53.1 56.4

SABMiller plc 46.5 46.5

Scottish & Southern Energy Plc 4.7 4.7

Smith & Nephew Plc 3.7 4.6

Standard Chartered Plc 0.7 1.0

Tesco Plc 10.0 10.0

Tullow Oil plc 4.7 4.9

Unilever Plc. UK listing 7.7 9.5

William Morrison Supermarkets plc 4.8 4.8

Vodafone Group Plc ordinary 28.9 29.6

Xstrata Plc 14.9 14.9

Other 0.1 0.1

italy

Assicurazioni Generali Spa 3.7 3.7

Enel S.p.A. 4.8 4.8

ENI Spa registered 16.2 16.2

Fiat Industrial S.p.A 0.6 1.8

Intesa Sanpaolo S.p.A. 3.9 3.9

Mediobanca Spa 2.3 2.3

Saipem S.p.A. 2.7 2.7

Snam S.p.A 2.1 2.1

Telecom Italia Spa 10.8 10.8

Unicredit SpA 6.5 7.7

Other 0.0 0.0

Jersey

Experian Group Ltd 4.1 4.1

Shire Plc 1.6 1.6

WPP Group Plc 8.3 10.9

luxemburg

ArcelorMittal S.A. 2.1 2.1

Tenaris S.A. 1.4 1.9

netherlands

Aegon N.V. 5.0 5.0

Akzo Nobel N.V. 5.5 6.3

Corio NV 2.6 2.6

EADS European Aeronautic Defence and Space Company 4.8 8.3

Eurocommercial Properties N.V. 5.3 5.9

ING Groep N.V. ordinary 10.8 10.8

Koninklijke Ahold N.V. 4.9 5.1

Koninklijke KPN NV 5.6 5.6

Koninklijke Philips Electronics N.V 6.3 6.3

STMicroelectronics N.V. 4.4 4.4

Unilever N.V. 4.2 4.7

norway

Clavis Pharma ASA 0.5 0.5

DnB ASA 5.8 6.0

Norsk Hydro ASA 4.6 4.6

Norwegian Property ASA 8.2 8.2

Statoil ASA 7.0 7.5

Storebrand ASA 3.1 4.2

Telenor ASA 2.8 3.6

Yara International ASA 4.4 4.6


Book value,

Eur million

Fair value,

Eur million

portugal

EDP – Energias de Portugal, S.A. 0.7 0.7

Galp Energia, SGPS, S.A 0.9 0.9

russia

IDGC North-West 2.6 2.6

MRSK Holding of Interregional Distribution Network 2.0 3.8

OJSC Moscow Exchange MICEX RTS, RUB 53.6 53.6

spain

Banco Bilbao Vizcaya Argentaria, S.A. 14.1 14.2

Banco Santander S.A. 19.8 19.8

Gas Natural SDG, S.A. 1.8 2.1

Iberdrola S.A. ordinary 5.3 5.3

Repsol SA 4.4 4.4

Telefonica S.A. 4.0 4.0

sweden

Atlas Copco AB 9.1 10.5

Atrium Ljungberg AB 6.6 7.6

Castellum AB 3.9 4.5

Ericsson LM AB B 25.8 28.0

Fabege AB 7.0 8.4

Hennes & Mauritz s.B 14.6 14.6

Hufvudstaden AB-A 5.4 7.5

Intrum Justitia AB 13.2 17.5

Kungsleden AB 3.3 3.3

Nordea Bank AB EUR 40.3 40.3

Nordea Bank AB SEK 79.3 80.8

Sandvik Ab 2.1 2.1

Skandinaviska Enskilda Banken AB s.A 3.1 3.3

Sotkamo Silver AB 1.7 1.7

Svenska Cellulosa AB 3.0 3.8

TeliaSonera AB 99.0 99.6

Volvo Ab s.B 13.9 13.9

Other 0.3 0.3

switzerland

ABB Ag 15.2 17.2

ABB Ltd 1.6 1.8

Compagnie Financiere Richemont SA s.A 1.3 2.9

Credit Suisse Group AG 10.6 10.6

Holcim Ltd 1.5 1.6

Nestle SA registered 19.4 28.2

Novartis AG registered 38.5 46.5

Roche Holdings AG 25.6 36.3

SGS SA- REG 1.8 2.4

Swiss Re AG 5.1 6.9

Syngenta AG 8.1 12.8

Transocean Ltd. 4.2 4.2

UBS AG registered 13.0 13.5

Zurich Financial Services AG 12.0 14.0

united states

Hewlett-Packard Company 5.9 5.9

Microsoft Corporation 15.2 15.2

NVIDIA Corporation 11.7 11.7

Unisys Corporation 6.1 6.1

total 1,777.7 1,997.7


29


Book value,

Eur million

Fair value,

Eur million

Foreign companies, non-listed

luxemburg

Lakeside Network Investments Sarl 60.0 60.0

united states

Other 0.1 0.1

total 60.1 60.1

Holding percentage in foreign companies 0.0001–15.7872%.

Holding higher than 1%:

OJSC Moscow Exchange MICEX RTS, RUB 15.79%

Lakeside Network Investments Sarl 10.00%

Sotkamo Silver AB 8.48%

IDGC North-West 3.34%

Intrum Justitia AB 1.94%

Clavis Pharma ASA 1.40%

Norwegian Property ASA 1.30%

Unisys Corporation 1.06%

Fixed-income funds

Apollo Offshore Credit Fund A-Initial Series 7.5 7.5

Apollo Offshore Credit Fund Ltd A-02–07 7.2 7.2

AXA IM US Short Duration High Yield $ A-class 45.8 66.6

AXA WF US High Yield Bonds USD 1 CAP 59.4 106.7

BlackRock Eur Instl Cash Series 225.6 225.6

Fidelity Funds – US High Yield 34.4 38.6

Goldman Sach Global High Yield Portfolio Class I 183.5 183.5

GS Euro Liquid Reserves Fund (inst.Dist) 464.4 464.4

JPM Euro Liquidity Institutional (flex dist.) 412.2 412.2

McDonnell Loan Opportunity Fund (Offshore) class A 2.0 2.0

McDonnell Loan Opportunity Fund (Offshore) class B 3.0 3.0

Morgan Stanley Euro Liquidity Fund (Institutional) 288.2 288.2

New Amsterdam Capital European Credit Fund Cl. SC 1.7 1.7

New Amsterdam Capital European Credit Fund Class D 2.0 2.0

OP-High Yield Fund A 20.0 27.1

OP-Likvidi A 100.0 100.1

T.Rowe Global High Yield Bond Fund 31.4 57.3

Other 0.0 0.0

total 1,888.4 1,993.8

Equity funds

Aberdeen Global Asian Smaller Companies Fund A2 29.0 78.2

Aberdeen Global China Equity 48.6 105.3

Aberdeen Global Sicav Asia Pacific Equity A2/C 54.0 112.5

Accendo Capital SICAV 12.9 12.9

Alfred Berg Small Cap Finland B (kasvu) rahasto 5.2 12.3


Book value,

Eur million

Fair value,

Eur million

Amundi Asian Growth Institutional Fund Class VII 3.5 4.5

AXA Rosenberg Japan Small Cap Alpha Fund 25.9 25.9

Bosera China Fund Plc Class 1 6.0 6.0

Capman Public Market Fund FCP-SIF Class A 20.7 31.4

Carnegie Global Health Care Fund 24.7 33.8

Carnegie Medical 47.0 70.7

China AMC CSI 300 Index ETF 23.2 25.1

CIP Emerging Markets Equity Fund I 34.4 48.9

DB X TRACKERS MSCI EM LATIN ETF 47.4 47.4

DB X-tracker Asia x-JP 10.4 10.8

DB X-trackers MCSI Pan Euro ETF 25.1 25.3

DB X-trackers MCSI Small Cap ETF 49.7 55.4

DB X-trackers MSCI ETF 23.3 25.0

East Capital Balkan Fund 8.4 8.4

East Capital Bering Balkan Fund USD 2.8 2.8

East Capital Bering Russia Fund class A 8.5 8.5

East Capital Bering Ukraine Fund class A Master 1.8 1.8

East Capital Bering Ukraine Fund Class R 6.0 6.0

Evli Greater Russia B 24.2 24.2

FC Global Climate Opportunities 4.7 4.7

FIM Brazil 13.4 13.4

FIM Bric+ 5.0 5.4

FIM Bric+ Small Cap 10.0 10.8

FIM Fenno 4.5 9.4

FIM Russia 8.4 9.1

Fondita Equity Spice 4.7 4.7

Fourton Fokus Suomi 4.2 4.2

Fourton Hannibal 4.0 4.0

Fourton Odysseus A 15.0 20.4

Fourton Stamina A 45.0 64.2

Health Care Select Sector SPDR ETF Fund 31.7 39.3

Icecapital European Property Fund B 6.6 6.6

Investec GS Asian Equity 45.0 49.5

Investec Pan Africa Fund I S6 USD 29.6 30.4

iShares MSCI Emerging Markets ETF 185.1 189.8

KJK Fund Baltic States B1 C 2.6 9.3

KJK Fund II, SICAV-SIF, Balkan A 10.0 10.2

Montanaro European Smaller Companies, Accum. Class 63.5 74.0

MSCI Europe value ETF 62.4 67.4

MSCI Nordic ETF 108.2 108.3

OP Kehittyvä Aasia 62.8 86.4

OP-Latinalainen Amerikka A 75.0 84.8

OP-Suomi Arvo A 3.3 6.2

OP-Suomi Pienyhtiöt A 12.7 14.1

Osmosis MoRE World Resource Efficiency Fund plc 1.9 1.9

PAM USA Fund I 71.6 73.9

Parvest Equity Latin America I 20.2 42.7

PF (Lux) Small Cap Europe-Z 32.8 60.3

PowerShares Global Clean Energy Portfolio 6.1 6.1

Prosperity New Russian Generation, A share 4.2 5.3


30


Book value,

Eur million

Fair value,

Eur million

Prosperity New Russian Generation, B share 4.2 7.9

Prosperity Quest II Unlisted Limited 20.1 20.1

Prosperity Russia Domestic Fund A 11.2 13.2

Prosperity Voskhod Fund Limited 41.0 52.5

Relational Investors XX L.P. 47.5 63.5

Russel Japan Equity Fund A Accum 72.8 72.8

Russell Emerging Equity Fund A 147.3 219.2

Seligson & Co Russian Prosperity Fund Euro K 46.5 49.1

SPDR S&P 500 ETF Trust 625.4 738.2

Taaleritehdas ArvoRein 10.0 11.1

Taaleritehdas Lyydian Leijona Osake Kasvu 14.3 14.3

Timber Capital Forest Fund (A shares) 64.9 78.1

Timber Capital Forest Fund II (Ordinary shares) 0.9 0.9

UBS Global Innovators I-A2-Acc 6.5 6.5

Vanguard MSCI Emerging Markets ETF 310.4 331.4

total 2,919.8 3,579.2

real estate funds

Aberdeen Indirect Property Partners Asia 17.5 17.5

Aberdeen Real Estate Fund Finland L.P. 56.2 57.3

AEW Value Investors Asia, LP 10.0 10.0

Alternative Property Income Venture 26.1 27.0

ARCH Capital – TRG Asian Partners, LP. 9.8 9.8

CapMan Hotels RE Ky 40.9 40.9

Capman Re II KY 13.2 16.3

Carlyle Europe Real Estate Partners II, L.P. 5.4 5.4

Carlyle Europe Real Estate Partners III, L.P. 31.3 33.5

Curzon Capital Partners III, LP. 21.4 23.6

ECE European Prime Shopping Centre Fund 22.7 25.2

European Office Income Venture 9.2 9.2

European Property Investors Special Opportunities 32.0 32.0

European Property Investors, LP 4.9 4.9

European Retail Income Venture 14.8 14.8

Fosca II 19.0 19.0

Franklin Templeton Asian Real Estate Fund 30.6 33.1

Frogmore Real Estate Partners, L.P 10.8 10.8

Goodman European Logistics Fund 15.0 15.0

Partners Group Real Estate Secondary 2009, LP 26.7 31.9

Pradera European Retail Fund 13.2 13.2

Real Estate Fund Finland I Ky 5.4 5.4

Rockspring German Retail Box Fund 18.5 18.5

Sierra Portugal Fund 14.0 14.0

The Archstone German Fund 30.0 31.8

VTBC-Ashmore Real Estate Partners I, L.P. 2.6 2.6

total 501.5 522.8


Book value,

Eur million

Fair value,

Eur million

private equity funds *)

Access Capital LP 0.6 0.6

Advent Private Equity Fund III D 0.8 0.8

Alpha Private Equity Fund IV 1.4 1.4

Alpha Private Equity Fund V 14.9 21.3

Antin Infrastructure Partners FCPR 30.5 32.1

Apax Europe V – D, L.P. 3.8 3.8

Apax Europe VI – A, L.P. 16.4 16.4

Apax Europe VII -B, L.P. 61.9 71.0

Apax VIII 6.0 6.0

Apollo Overseas Partners VII, L.P. 28.5 38.8

Arcadia II 5.0 5.0

Arcus European Infrastructure Fund 1 L.P. 20.9 20.9

Atlas Venture VI 0.8 0.8

Axa Secondary Fund IV L.P. 27.7 38.2

Baltic Investment Fund III L.P 0.7 0.7

BC European Capital IX, LP 26.0 27.3

BC European Capital VIII 18.3 18.4

Bluedrip L.P. 15.0 15.0

Bridgepoint Europe II B 2.0 2.0

Bridgepoint Europe III 18.7 18.7

Bridgepoint Europe IV 31.5 35.9

CapMan Buyout Fund IX 36.1 39.7

CapMan Buyout VIII Fund A L.P. 12.9 16.7

CapMan Mezzanine V Fund FCP-SIF 7.3 8.6

Capman Technology Fund 2007 L.P. 2.2 2.2

Chiron Guernsey Holdings, LP INC 11.0 16.8

Cidron Childsafe Limited 10.0 16.4

Coller International Partners V 17.8 27.8

Consumer Equity Investments Limited 12.3 12.3

CVC Europe V 21.7 27.3

Darwin Private Equity I 9.7 9.7

Dasos Timberland Fund I 12.0 12.0

Doughty Hanson & Co IV, Limited Partnership 4 16.0 16.0

Doughty Hanson V 25.5 25.5

EPE Overseas Co-Investors L.P. 6.8 6.8

EQT VI Fund 11.4 11.4

European Mid Market Secondary Fund II LP 5.8 7.0

European Mid-Market Secondary Fund I 37.0 44.5

European Strategic Partners 3.3 3.3

GrowHow I Ky 0.7 0.8

HarbourVest Partners VI-Buyout Partnership Fund LP 1.4 1.4

HarbourVest Partners VI-Partnership Fund L.P. 3.7 3.7

HG Capital 5 7.5 8.2

HgCapital 6 22.5 24.9

Ilmarisen Suomi-Rahasto I Ky 7.1 7.1

Industri Kapital 2000 L.P. I 2.0 2.0

Intera Fund I Ky 7.8 9.4

Inveni Secondaries Fund II Ky 0.6 0.6

Isis IV L.P. 12.2 12.2


31


Book value,

Eur million

Fair value,

Eur million

Kasvurahastojen Rahasto Ky 4.7 4.7

KKR 2006 Fund L.P. 22.7 22.9

KKR Asian Fund L.P. 15.3 23.9

KKR E2 Investors L.P. 0.9 1.6

KKR European Fund II, LP 18.9 18.9

KKR European Fund III 28.8 31.5

Lifeline Ventures Fund I Ky 0.9 0.9

Lifeline Ventures III AB 0.5 0.5

MB Equity Fund III Ky 7.4 10.3

MB Equity Fund IV Ky 10.8 10.8

Midinvest Fund II Ky 0.6 0.6

Montagu IV Co-Invest 1 LP 9.2 9.2

Montagu IV LP 15.5 15.5

Mount Kellett Capital Partners (Cayman), L.P. 25.7 36.9

Nordic Capital V 11.2 15.0

Nordic Capital VI 33.1 33.1

Nordic Capital VII 63.2 71.0

PAI Europe V FCPR 13.5 15.2

PAI Europe V LP 5.4 5.5

Partners Group European Mezzanine 2008 35.0 39.4

Permira Europe II LP2 0.8 0.8

Permira Europe III LP 7.7 7.7

Permira IV LP 56.2 57.2

Redtop Co-Invest LP 18.4 18.4

Seedcap Ky 0.6 0.6

Selected Mezzanine Funds I Ky 15.9 16.8

Selected Private Equity Funds I Ky 3.0 3.0

Sentica Buyout III Ky 14.8 19.3

Sentica Kasvurahasto II Ky 1.9 1.9

Silver Lake Partners III L.P. 27.1 28.4

Sponsor Fund II Ky 0.9 0.9

Sponsor Fund III Ky 12.9 13.4

The Fifth Cinven Fund 4.9 4.9

The First European Fund Inv L.P 1.8 1.8

The Fourth Cinven Fund Limited Partnership 39.7 46.7

The Third Cinven Fund Limited Partnership 2.9 2.9

Towerbrook III 17.1 19.8

Vaaka Partners Buyout I Ky 2.9 2.9

Valhalla Co-Invest L.P. 10.1 13.2

Verdane ETF II SPV Ky 2.1 5.3

Verdane ETF III SPV K/S 1.3 1.3

Veronis Suhler Stevenson Communications PartnersIV 5.1 5.1

Other 2.4 13.2

total 1,229.7 1,402.7


Book value,

Eur million

Fair value,

Eur million

other funds

Bluecrest Capital International F EUR 20.0 20.5

Brevan Howard Fund B Class Limited 19.4 33.5

Citadel Kensington Global Strategies LTD 29.9 42.2

D.E Shaw Composite International Fund s. New Issue 23.2 33.9

Davidson Kempner Int. Ltd. - Class C Tranche 4 18.4 26.9

HBK Offshore Fund Ltd class C 19.0 23.8

Man Absolute Return Strategies I Ltd: Class ARS1|2 5.2 6.0

Och Ziff Europe Overseas Fund Ltd 18.6 24.9

Och-Ziff Asia Overseas Fund, Ltd 10.2 11.7

Palmetto Fund, Ltd. Class D 01Apr2011 0.7 0.9

Palmetto Fund, Ltd. Class D 01Feb2010 1.1 1.1

Palmetto Fund, Ltd. Class D 01Jan2008 11.8 15.6

Palmetto Fund, Ltd. Class D 01Jul2011 1.1 1.4

Palmetto Q4 2012 Sandy Dev. Class D 01Jan2008 1.5 2.0

Paulson Credit Opportunities Ltd. 2.7 33.8

QVT CSI Offshore A1137 0.7 0.8

QVT Offshore Class 1-NI 1075 14.1 15.0

QVT SLV Offshore Ltd. B1146 2.2 2.5

Shepherd Investments International, Ltd. Class BQ 2.4 2.5

Solon Capital Ltd Class S 0.8 1.0

Ursus International Ltd. B/1 8.4 8.4

Vicis Capital Fund (International) 2.7 2.7

Other 1.6 1.8

total 215.7 313.0

total 11,605.5 13,584.8

*) Real estate funs are not includedThe book value of shares and holdings listed here exceed EUR 0.5 million.


32


opEn sEcuritiEs agrEEmEnts, parEnt company

securies borrowed

Number 1.1 1.8

Fair value 21.2 22.3

Borrowed equities are listed shares.All loans have a maturity under one year and can be halted any time.The current value of the assets pledged as security for lending is presented in the notes to the balance sheet underSecurities and financial commitments.

loan rEcEivaBlEs, parEnt company

other loans itemised by guarantee

Bank guarantee 466.3 596.9

Guarantee insurance 183.5 157.3

Other 253.6 285.9

Secured loans, remaining acquisition cost 903.4 1,040.1

Unsecured loans, remaining acquistion cost 545.8 640.0

Remaining acquisition cost, total 1,449.2 1,680.2

total premium loan receivables itemised by balance sheet item

Loans guaranteed by mortgages 465.4 549.2

Loans to participating interests - 0.5

Other loans 689.4 796.0

Remaining acquisition cost, total 1,154.8 1,345.7

inner circle loans

Loans granted to companies belonging to the Group 149.1 136.7

Loans granted to associated companies 184.6 191.5

The loan period is 10−29 years and the loans are both loans repayable in instalments within the loan period and single payment loans repayable at the expiry of the loan period.The interest is mainly tied either to the fixed or variable TyEL referance rate.


33


Eur million 2012 2011 2012 2011

spEciFication oF capital and rEsErvEs

Capital and reserves

Initial fund

Jan. 1 23.0 - 23.0 -

Transfer from other funds - 23.0 - 23.0

Guarantee capital

Jan. 1 - 23.0 - 23.0

Repayment of guarantee capital - -23.0 - -23.0

23.0 23.0 23.0 23.0

Other reserves

Reserves under the Articles of Association

Jan. 1 54.5 74.9 54.5 74.9

Transfer to initial fund - -23.0 - -23.0

Distributed interests on guarantee capital - -0.6 - -0.6

Asset transfer tax on repayment of guarantee capital - -0.4 - -0.4

Transfer from unused donation funds 0.0 0.0 0.0 0.0

Transfer from previous year's profit 5.7 3.5 5.7 3.5

Other reserves - - 0.6 0.6

60.2 54.5 60.8 55.1

Profit/loss brought forward

Jan. 1 5.8 4.9 -53.0 -47.0

Distributed interests on guarantee capital - -1.1 - -1.1

Transfer to donations -0.1 -0.3 -0.1 -0.3

Transfer to reserves under the Articles of Association -5.7 -3.5 -5.7 -3.5

- - -58.8 -52.0

Profit/loss for the financial year 3.0 5.8 3.6 -1.0

86.3 83.3 28.6 25.0

Breakdown of capital and reserves after proposed distribution of profits:

Owners guarantee capital

Guarantee capital - - - -

Proposed distribution of profits to owners - - - -

Policyholders’ share 86.3 83.3 28.6 25.0

Total 86.3 83.3 28.6 25.0

distributable profits, parent company

Profit/loss for the financial year 3.0 5.8

+ Other funds

Reserves under the Articles of Association 60.2 54.5

Distributable profits, total 63.3 60.3


34


spEciFication oF tEchnical provisions

provision for unearned premiums

Future pensions 13,088.5 12,734.3


Provision for current bonuses 62.4 55.2

Supplementary insurance liability tied to income from shares 167.3 -155.1

total 13,795.8 13,040.7

provision for claims outstanding

New pension awarded 10,804.0 10,167.8

Equalisation provision 986.0 996.9

total 11,790.0 11,164.7

total technical porvisions 25,585.9 24,205.5

sEcuritiEs and Financial commitmEnts, parEnt company

as security for own debts

Mortgaged as security for rents 0.3 0.3

Assets pledged as security for derivative contracts

Securities 508.2 508.1

Cash 1) 41.6 8.4

Assets pledged as security under repo agreements, book value

Securities 0.0 4.9

Assets pledged as security for equity lending

Cash 1) 23.0 32.01) The cash collaterals, EUR 64.6 million, provided as security in the transfer according to the Act of Financial Collateral Arrangements are included in the balance sheet item Other liabilities

The cash assets, EUR 1,555.1 million, pledged as security in the transfer according to the Act on Financial Collateral Arrangements, are included in the balance sheet item Other liabilities.

off-balance-sheet commitments and liabilities

investment commitments

Private equity funds 1,585.7 1,000.0

Other 51.8 52.2

derivative contracts

Non-hedging

Interest derivatives

Future and forward contracts

Open, underlying instrument -965.2 -1,413.2

fair value 0.0 0.0

Option contracts

Open, bought, underlying instrument 14,393.5 27,756.9

fair value 276.2 508.0

Open, written, underlying instrument -15,865.7 -27,354.7

fair value -225.8 -233.9

Interest rate and credit default swaps

Open, underlying instrument -5,004.7 -22,847.7



35


Currency derivatives

Forward contracts

Open, underlying instrument 4,587.1 4,654.9

fair value 5.9 -22.7

Closed, fair value 4.1 -0.5

Option contracts


fair value 1,429.7 1,466.0

Open, written, underlying instrument -5,239.1 -4,204.5

fair value -222.6 -322.4

Equity derivatives


Open, underlying instrument -1,782.8 -4,099.9

fair value 0.4 43.4

Option contracts



Open, written, underlying instrument -911.2 -4,242.6

fair value -29.4 -88.8

Total returns swaps

Open, underlying instrument -536.3 -190.6

fair value 1.0 4.8

Other derivatives


Open, underlying instrument 53.2 121.5


Option contracts

Open, bought, underlying instrument 241.9 386.7


Open, written, underlying instrument 0.0 -109.8

fair value 0.0 -4.7

Total returns swaps

Open, underlying instrument 56.8 150.0

fair value -3.4 -6.9

Profits on closed and mature derivatives have been recognised in full in profit and loss account.

valuation principlesThe fair values of listed derivatives are calculated using the price quoted on the stock exchange.The fair values of unlisted equity and commodity derivatives are based on the market prices of similar listed instruments or estimates of fair values by external parties. The fair values of interests and currency derivatives are based on market quotes, estimates of fair values by external parties or they are determined using generally known theoretical pricing models.

amount of joint and several liability

The company belongs to a tax liability group represented by OKO Bank Group Central Cooperative. Group members arecollectively responsible for the value-added tax payable by the Group.

vat deduction refund liabilities 4.5 4.6

leasing and rent liabilities

Due in the next year 1.0 1.3

Due in subsequent years 0.4 1.1

other financial commitments 2.9 2.7


36


solvEncy capital, parEnt company

Capital and reserves after proposed distribution of profits 86.2 83.2

Accumulated appropriations 2.7 2.5

Difference between current value and book value of assets 4,196.0 3,378.9


Other items -13.8 -13.4

Amount of provision for pooled claims treated egual to solvency capital 1,003.6 951.2

5,752.4 4,808.7

Minimum solvency capital required under the Employee Pension Insurance Companies Act (TVYL), sector 17 481.7 456.6

The equalisation provision for years with heavy losses is included in the technical provision 986.0 996.9

In accordance with 16 § of the Act on Employment Pension Insurance Companies, the solvency capital excluding the amount of provision for pooled claims treated equal to working capital is 4,748.8 3,857.5

The minimum amount of solvency capital for employment pension insurance companies excluding the temporary relief for 2008–2010 in accordance with the Act 853/2008 1,851.6 1,312.2


37

KEY FIGURES AND ANALYSESKey figures in brief 2012 2011 2010 2009 2008

Premiums written, EUR million 4,019.3 3,725.5 3,383.2 3,184.1 3,264.4

Pensions and other payments made, EUR million 1) 3,847.8 3,567.3 3,266.3 3,056.7 2,701.2

Net return on investments at fair value, EUR million 2,048.4 -1,153.0 2,738.8 3,410.4 -4,571.5

ROCE, % 7.5 -4.0 10.8 15.8 -17.7

Turnover, EUR million 5,269.2 3,210.3 4,597.9 5,156.3 -193.7

Total operating expenses, EUR million 144.0 130.9 128.0 121.4 113.5

Total operating expenses, % of turnover 2.7 4.1 2.8 2.4 neg.

Operating expenses covered by loading profit 108.7 95.9 92.1 87.5 83.3

% of TyEL and YEL payroll 0.6 0.6 0.6 0.6 0.5

Total profit, EUR million 931.2 -1,791.9 1,706.2 2,180.4 -4,338.1

Technical provisions, EUR million 25,585.9 24,205.5 24,657.4 22,609.7 20,612.8

Solvency capital, EUR million 5,752.4 4,808.7 6,578.2 4,876.9 2,673.0

% of technical provisions 2) 23.9 21.1 29.7 24.0 14.0

in relation to solvency border 2.16 2.54 2.60 2.73 1.99

Equalisation provision, EUR million 986.0 996.9 1,067.9 971.4 993.9

Pension assets, EUR million 3) 29,781.9 27,584.3 28,664.1 25,084.2 21,624.8

Transfer to client bonuses, % of TyEL payroll 0.37 0.35 0.48 0.37 0.21

TyEL payroll, EUR million 16,694.2 15,923.8 14,702.0 14,041.0 14,623.0

YEL payroll, EUR million 1,366.9 1,268.7 1,142.8 1,088.3 1,049.2

TyEL policies 4) 37,462 36,511 36,767 35,840 35,793

Employees insured under TyEL 529,000 515,000 501,000 472,000 480,000

YEL policies 58,776 56,717 53,660 52,243 52,814

Pensioners 307,934 302,093 295,827 282,982 273,605

1) Claims paid in Profit and Loss account exluding costs for claims handling and working capacity maintenance2) The ratio was calculated as a percentage of the technical provisions used in calculating the solvency border3) Technical provisions + differences between current and book values4) Insurance policies of employers that have concluded insurance contracts

pErFormancE analysis

Eur million 2012 2011 2010 2009 2008

source of profits

Technical underwriting result -7.0 -69.4 96.4 -22.5 76.4

Return on investments at fair value 911.2 -1,756.2 1,578.1 2,175.2 -4,449.2

+ Net return on investments at fair value 2,048.4 -1,153.0 2,738.8 3,410.4 -4,571.5

- Return requirement on technical provisions -1,137.1 -603.2 -1,160.7 -1,235.3 122.3

Loading profit 27.0 33.7 31.6 27.7 34.7

total result 931.2 -1,791.9 1,706.2 2,180.4 -4,338.1

distribution of profits

Increase/decrease solvency (+/-) 869.2 -1,846.9 1,635.2 2,128.4 -4,369.1

Equalisation provision (+/-) -10.9 -71.0 96.6 -22.5 76.0

Solvency capital (+/-) 880.1 -1,775.9 1,538.6 2,150.9 -4,445.1

Change in provision for future bonuses 59.8 -1,153.9 6.9 685.0 -3,361.1

Change in difference between current and book values 817.1 -627.8 1,532.2 1,462.5 -1,088.2

Change in accumulated appropriations 0.2 0.1 -5.4 -0.5 -1.9

Profit for the financial year 3.0 5.8 4.9 3.9 6.0

Transfer to client bonuses 62.0 55.0 71.0 52.0 31.0

total 931.2 -1,791.9 1,706.2 2,180.4 -4,338.1


38

solvEncy

2012 2011 2010 2009 2008

solvency capital and limits

(% of the technical provision used in calculating the solvency border)

Solvency border 11.1 8.3 11.4 8.8 7.0

Maximum solvency capital 44.3 33.1 45.6 35.2 28.2

Solvency capital 1) 23.9 21.1 29.7 24.0 14.0

1) For 2008–2010 includes the following amount of provision for pooled claims treated equal to solvency capital

Solvency capital Provision for pooled claims treated equal to solvency capital

50

40

30

20

10

0

2008 2009 2010 2011 2012

Solvency border Maximum solvency capital

BrEaKdoWn oF invEstmEnts (Fair valuE)

2012 2011 2010 2009 2008

Eur million %

Eur million %

Eur million %

Eur million %

Eur million %

Loan receivables 1) 2,352.0 8.3 2,796.6 10.3 3,137.8 11.2 3,211.8 12.8 2,695.6 12.9

Bonds 1) 2) 8,785.5 31.0 8,716.5 32.1 8,328.2 29.6 8,954.3 35.6 8,574.8 41.1

incl. fixed-income funds 503.3 1.8 458.7 1.7 696.6 2.5 595.8 2.4 598.6 2.9

Other money market instruments and deposits 1) 2) 3) 739.9 2.6 150.3 0.6 202.2 0.7 579.1 2.3 122.4 0.6

incl. fixed-income funds * 1,490.5 5.3 -53.1 -0.2 -0.4 0.0 -0.2 0.0

Shares and participations 13,010.2 45.9 12,228.0 45.1 13,425.0 47.7 9,856.8 39.1 6,969.4 33.4

Real estate 4) 3,465.7 12.2 3,237.1 11.9 3,028.4 10.8 2,577.9 10.2 2,509.5 12.0

incl. investment funds and joint ventures 522.8 1.8 500.5 1.8 404.8 1.4 341.7 1.4 418.1 2.0

investment total 28,353.4 100.0 27,128.4 100.0 28,121.7 100.0 25,179.8 100.0 20,871.7 100.0

Motified duration of the bond portfolio 0.7 0.2 3.1 3.2 3.6

1) Accrued interest included2) Of the fixed-income funds, long-term fixed-income funds are included in bonds and short-term fixed-income funds in other money market instruments

and deposits 3) Including deposits classified as investments on the balance sheet4) Including shares in mutual funds that invest in real estate or real estate corporations, and similar investments in collective investment funds* After deduction of debt related to cash securities received

Solvency, % of technical provisions


39

BrEaKdoWn oF invEstmEnt incomE and invEstmEnt rEsult

Eur million 2012 2011 2010 2009 2008

direct net income 851.3 774.6 554.1 735.6 374.6

Loan receivables 107.4 117.9 125.0 123.2 76.0

Bonds 183.5 250.4 162.6 251.9 365.5

Other debt securities and money market instruments -2.2 -1.7 -1.8 10.9 46.4

Shares and participations 479.1 306.0 159.8 265.8 -182.4

Real estate 107.6 100.4 100.2 90.0 81.1

Unallocated income, costs and operating expenses -24.1 1.6 8.3 -6.2 -11.9

changes in book value 1) 379.9 -1,299.7 652.5 1,212.3 -3,857.9

Shares and participations 86.1 -718.1 706.8 687.3 -2,994.2

Bonds 346.1 -538.4 -50.3 547.6 -872.4

Real estate -35.6 -21.3 -1.7 -16.9 8.7

Other -16.6 -22.0 -2.2 -5.8 0.0

net return on investments at book value 1,231.2 -525.1 1,206.6 1,947.9 -3,483.3

change in difference between fair and book value 2) 817.1 -627.8 1,532.2 1,462.5 -1,088.2

Shares and participations 604.0 -833.9 1,477.2 1,082.2 -1,390.4

Bonds 124.0 136.1 -66.1 350.1 232.9

Real estate 84.2 75.0 121.1 30.2 69.1

Other 4.9 -5.1 0.0 0.0 0.1

net return on investments at fair value 2,048.4 -1,153.0 2,738.8 3,410.4 -4,571.5

yield requirement on technical provisions 3) -1,137.1 -603.2 -1,160.7 -1,235.3 122.3

return on investments at book value 94.1 -1,128.4 45.9 712.6 -3,361.0

return on investments at fair value 911.2 -1,756.2 1,578.1 2,175.2 -4,449.2

the proportion of derivatives in the net return on investments -382.2 112.8 -228.5 202.2 -703.3

1) Capital gains and losses and other costs in book values2) Changes in value not included in the balance sheet3) In 2008, the interest requirement in accordance with the supplementary multiplier for pension liabilities was not included in the total required rate of return

on technical provisions


40

nEt invEstmEnt incomE at Fair valuE, January 1–dEcEmBEr 31, 2012

Fair value 1) EUR million

Capital employed 2)

EUR million ROCE, % ROCE, % ROCE, % ROCE, % ROCE, %

2012 2012 2012 2011 2010 2009 2008

Loan receivables 90.7 2,638.9 3.4 3.3 3.9 4.0 4.9

Bonds 3) 710.7 8,312.2 8.6 -1.1 1.6 17.1 -5.8

incl. fixed- income funds 57.1 457.8 12.5 0.3 14.2 38.3 -28.6

Other money market instruments and deposits 3)* 5.8 288.4 2.0 -10.7 0.3 1.3 4.6

incl. fixed-income funds* 3.0 -95.2

Shares and participations 1,097.5 12,759.7 8.6 -9.6 21.7 26.5 -36.9

Real estate 4) 167.7 3,288.6 5.1 6.4 9.0 -0.6 6.1

inc. investment funds and joint ventures 11.4 508.8 2.2 8.9 6.1 -27.1 -5.2

investment total 2,072.5 27,287.9 7.6 -4.0 10.8 15.8 -17.7

Unallocated income, costs and operating expenses -24.1 27,287.9 -0.1 0.0 0.0 0.0 0.0

net investment income, total 2,048.4 27,287.9 7.5 -4.0 10.8 15.8 -17.7

1) Net return on investments at fair value = change in market value between the beginning and end of the reporting period less cash flows during the period.

Cash flow means the difference between purchases/costs ans sales/revenues2) Capital employed = market value at the beginning of the reporting period + daily/monthly time-weighted cash flows3) Including income from fixed-income funds appearing in the statistics under the investment type at issue4) Including income from investment funs and joint ventures listed in the statistic under real estate investments* After deduction of debt related to cash securities received

loading proFit

Eur million 2012 2011 2010 2009 2008

Expense loading components 126.6 122.6 117.5 109.0 111.7

Premium components available to be used to cover operating expenses resulting from claims settlements 6.8 6.2 5.6 5.3 5.0

Other income 2.2 0.8 0.5 0.9 1.3

Total loading profit 135.6 129.6 123.7 115.2 118.0

Activity-based operating expenses 1) -108.7 -95.9 -92.1 -87.5 -83.3

Other expenses 0.0 0.0 0.0 0.0

Total operating expenses -108.7 -95.9 -92.1 -87.5 -83.3

loading profit, total 27.0 33.7 31.6 27.7 34.7

Operating expenses as a percentage of loading profit 80.1 74.0 74.5 75.9 70.6

1) Excluding operating expenses from investment activities and activities to maintain ability to work and statutory charges

maintEnancE oF WorK capacity

Eur million 2012 2011 2010 2009 2008

Premiums written; disability risk administrative cost component 5.0 4.8 4.4 3.7 3.7

Claims incurred; maintenance of work capacity expenses -5.1 -5.2 -7.4 -6.9 -4.9

-0.1 -0.4 -3.0 -3.2 -1.2

maintenance of work capacity expenses/ disability risk administrative cost component, % 102.6 109.0 167.6 188.0 132.2

ILMARINEN IN 2012 Risk Management

41

RISK MANAGEMENT AT ILMARINEN1. risK managEmEnt as a part oF company managEmEnt and intErnal control Risk management is part of the company’s normal manage-ment and internal control. Risk management means the pro-cedures and practices used to continually identify, assess, control and monitor the risks related to the company’s opera-tions, compliance with laws and the realisation of the compa-ny’s goals. Risk management is implemented through Ilmarinen’s management and supervisory system and is based on the company’s principles that enhance management and accountability. This makes risk management part of the com-pany’s operating practices, decision-making and processes, increasing the probability of achieving its goals and supporting compliance with legislation, regulations and international standards.

The procedures in place for implementing and monitoring risk management are based on decisions concerning the organ-isational structure, the arrangement of operating processes and resources. The greater the potential risks involved in the pro-cesses or decisions to be made, the more specified the form of the decision-making authorisations and procedures, the admin-istrative structure of the processes and their monitoring. The roles and responsibilities defined within the operating pro-cesses, the appropriate differentiation of duties, access rights, the verification of the accuracy of information, tested back-up arrangements and documentation of information systems and processes are essential means of risk management.

2. organisation oF risK managEmEnt and rEsponsiBilitiEs

General framework for risk managementThe risk management processes have been embedded into the organisation’s governance, strategy and planning, management, reporting processes, operating principles, values and culture. The company’s risk management plan, supplemented by the investment plan in the area of investment operations, defines the framework for risk management. Risk management is inte-grated into the company’s operations through process specifi-cations; this not only ensures operational efficiency and risk management awareness but also the verifiability of risk man-agement. Specifying and describing business, management and support processes in a way that makes risk management an integral part of them is a prerequisite for the successful imple-mentation of risk management.

Risk management encompasses responsibility for risks, man-agement instruments and risk handling duties. Risk manage-ment is not a distinct function, unrelated to the other opera-tions and processes within the organisation, rather it is part of the management’s field of responsibility and part of all of the organisation’s processes, such as strategic planning and the processes involved in projects and change management. The employees and administrative organs must be aware of the

risks, management instruments and duties for which they are responsible.

Responsibilities in risk managementThe overall responsibility for ensuring that the company has a functioning control and risk management system in place lies with the Board of Directors and the President and CEO. The Board of Directors reviews and approves Ilmarinen’s risk man-agement plan and investment plan annually. The Board of Directors has an audit committee which assists the whole Board of Directors in supervision tasks that concern the com-pany’s financial reporting, risks and internal control system and the work of the internal audit unit and external auditors. The Supervisory Board is responsible for supervising the corporate governance actions undertaken by the company’s Board of Directors and President and CEO. Supervision of decision-making on pensions and investment operations is carried out on behalf of the Supervisory Board by supervisors appointed by the Supervisory Board from among its members.

Ilmarinen’s core and support functions have the primary responsibility for the risks involved in their fields of responsibil-ity and in the decisions they make as well as for their manage-ment. Thereby the owners of these risks are responsible for the implementation of the risk management process in their own fields of responsibility in accordance with the defined frame-work. In practice, this means identifying and assessing the risks related to the company’s goals and operations and taking action to manage these risks. In addition, materialised risks and near misses are reported in accordance with the principles defined within the company.

The risk management function (and other support functions in their own fields of responsibility, such as legal matters, finance, HR and communication and ICT), monitors and sup-ports the implementation and maintenance of effective risk management procedures and practices in the operations own-ing the risks and assists these in risk reporting. The company’s risk management function is also responsible for developing the company’s risk management principles and framework. Ilmarinen’s Risk Management Committee, chaired by the head of Risk Management, co-ordinates the implementation of risk management in the company.

Ilmarinen’s Internal Audit supports the company’s Board of Directors and President and CEO in their supervisory tasks. The Internal Audit’s tasks are to assess the appropriateness, effectiveness, efficiency and adequacy of risk management, internal control and management and administrative proce-dures in Ilmarinen’s operations and processes and to make rec-ommendations to improve them. In addition to the Internal Audit, external auditors evaluate the effectiveness of the inter-nal control system and the adequacy of risk management. The external auditors also evaluate the effectiveness of internal auditing and the relevance of its results to their own work.

The aim of Ilmarinen’s Compliance function is to ensure the internal and external trust in the company’s operations by strengthening a positive risk management culture, both in


42

terms of internal and external regulation and abiding by good market practices. The key task of the Compliance function is to ensure reliable governance and the smooth functioning and sufficiency of internal control as well as to support the business management in these matters. The Compliance function is part of internal control and its objective is to ensure that all of Ilmarinen’s operations conform with legislation, guidelines and regulations given by authorities, good insurance practices, pro-cedures and guidelines approved by the Board of Directors as well as guidelines concerning internal practices. The Compli-ance function monitors and ensures compliance with regula-tions by, among other things, evaluating internal processes and approaches and providing the management and business func-tion with necessary improvement suggestions.

3. risKs and thEir classiFication Risks that put Ilmarinen’s successful operations in jeopardy can be any factors which

• adversely affect the company’s possibilities to flawlessly perform its statutory task;

• adversely affect the company’s possibilities to achieve its short or long term goals or

• otherwise threaten the continuity of the company’s opera-tions. On the other hand, they can be events that hinder or interfere

with the company’s operations or they can materialise as busi-ness opportunities which would be worth capturing but which remain untapped.

To boost risk management, risks are classified at Ilmarinen according to the risk classes specified in the solvency frame-works for the financial sector (Basel II, Solvency II).

Strategically significant risks essentially threaten the achieve-ment of the company’s strategic goals and, at the same time, the company’s result or solvency. Like minor risks, strategically significant risks can be divided into business, financial, reputa-tion or operational risks. This division is illustrated in the figure below.

Business risk refers to the probability of loss inherent in changes occurring in the competitive situation and in the industry as well as the failure of business decisions or their implementation.

Financial risks include market, credit, liquidity and under-writing risks as well as the risk of not adequately meeting the requirements and targets set for asset/liability matching (ALM risk).

Operational risks refer to the probability of loss inherent in inadequate or failed internal processes, human resources and systems or external events.

Reputation risk is the possible deterioration of the company’s reputation among the various stakeholders leading to a loss of business and to a negative result. In the financial sector, dam-age to reputation has often been connected with unpredicted loss situations in other risk classes and can essentially weaken the company’s possibilities to operate independently.

4. undErWriting risKs and thEir managEmEnt

Insurance contributions and technical provisionsUnderwriting risks are related to the adequacy of insurance contributions and technical provisions. The calculation of both is determined by the company’s calculation bases, which are confirmed by the Ministry of Social Affairs and Health. The aim of risk management in the underwriting business is to ensure that the calculation bases meet the sustainability criteria required by law, which is the responsibility of the company’s actuary.

Under the Employees Pensions Act (TyEL), the Ministry of Social Affairs and Health may not confirm differences in the pension insurance terms and conditions or calculation bases which would impede the implementation of TyEL or the han-dling of business under the joint responsibility of pension insti-tutions, unless it has a special reason for doing so. Further-

RePuTaTIon RISK

aLM RISK

BuSIneSS RISK

MaRKeT RISK CReDIT RISKLIquIDITy

RISK

unDeR-WRITInG

RISK

oPeRaTIonaL RISK

FInanCIaL RISKS


43

more, the law requires that pension institutions co-operate to achieve this goal. As a consequence of the above, the bases for calculating insurance contributions and technical provisions are the same for all pension insurance companies, excluding certain exceptions.

The insurance contributions and the technical provisions include a component corresponding to the business under the company’s own responsibility and a component corresponding to the business under the joint responsibility of pension institu-tions (pay-as-you-go business), which means that also risks can be classified accordingly. The classification can also be based on the type of insurance to be applied. 99% of Ilmarinen’s technical provisions are governed under TyEL, hence the risks are almost entirely related to TyEL activities. In practice, YEL insurance in its entirety is the joint responsibility of the com-panies and ultimately the State, which means that the risks faced by individual companies are negligible. This is why only TyEL insurance and related risks are examined in the follow-ing.

TyEL business under the company’s own responsibility con-sists of old-age, disability and unemployment pension business as well as a contribution loss component relating to unpaid contributions. Essential factors in risk management are the uncertainty relating to life expectancy, pension incidence and the amount of claims. From a financial viewpoint, the most significant risks concern the uncertainty related to mortality and incidence of disability pensions.

The mortality expectancy applied in the calculation bases depends on age, gender and birth year class. This dependency has proved to be necessary due to the trend of longer average life spans. The working group set up by the Finnish Pension Alliance TELA monitors the development of the average life span for those covered by the statutory earnings-related pen-sion system and makes proposals to change the calculation bases if needed. A change in the mortality base makes it neces-sary to change the bases for the calculation of the technical provisions, the costs of which are the joint responsibility of pension institutions. Therefore a change in the bases does not involve any company-specific risks.

The risks in the disability pension business are related to the incidence of disability pensions, the amount of the granted pensions and the termination of the valid disability pensions. Disability pensions are funded when the pension commences. The cost from starting disability pensions is covered by the dis-ability pension component included in the insurance contribu-tion, which is dependent on age and, in the case of larger employers, also on the employer’s contribution category. The cost is calculated until the age of retirement, also taking into account the expected termination of disability pensions. The disability pension component of the insurance contribution is confirmed annually and its adequacy is monitored by a working group set up by the Finnish Pension Alliance TELA. In 2013, it is on average 0.9% of an employee’s salary. The disability pension business involves a company-specific risk that the com-pany’s disability pension expenditure deviates from what was expected when determining the calculation bases. This risk is increased by the long delay between the commencement of the company’s responsibility and the beginning of the pension.

That is why Ilmarinen regularly monitors the development of the disability pension business and the incidence of pensions.

Following the earnings-related pension reform carried out in 2005, the last unemployment pensions will be granted in 2012 and the payment of the last pensions will end by the end of 2014. No insurance contribution is collected for this; the con-tributions collected earlier are expected to cover the payment of the remaining unemployment pensions. The risks inherent in unemployment pension business are thus being phased out.

The risk inherent in contribution loss is related to a higher than expected amount of unpaid contributions. The contribu-tion loss component of the insurance contribution has been dimensioned to correspond to the insurance portfolio structure to take into account the larger contribution loss risk of smaller employers. In Ilmarinen’s portfolio, contribution losses have been lower than the average.

equalisation provisionThe calculation bases for the TyEL insurance contribution must be confirmed in advance for the following calendar year. It is not possible to dimension the contribution in advance to correspond exactly to the following year’s expenditure, which means that the underwriting result fluctuates from year to year and is either positive or negative. The equalisation provision contained in technical provisions serves as a buffer against fluctuations in the underwriting result. A positive underwriting result adds to the equalisation provision and a negative one reduces it.

The equalisation provision has a lower limit and an upper limit and a target zone in between. If a company’s equalisation provision falls short of its lower limit, it must be supplemented from the solvency capital. If the companies’ equalisation provi-sions together exceed the target zone upper limit, the increase in equalisation provisions is limited by reducing the disability pension component or contribution loss component of the insurance contribution during the following years, depending on which component has led to the limit being exceeded. Sim-ilarly, if the equalisation provisions fall short of the target zone lower limit, the above-mentioned components are increased. If the equalisation provision of an individual company exceeds its upper limit in two consecutive years, the excess will be dis-solved within a certain time frame through client bonuses paid to policyholders.

As a general rule, the equalisation provisions of pension insurance companies are on a high level, so the contribution has been kept lower than the expected expenditure in order to reduce the equalisation provisions.

An amendment coming into force at the beginning of 2013 will make the equalisation provision part of the company’s sol-vency capital.

At the end of 2012, Ilmarinen’s TyEL insurance equalisation provision amounted to EUR 967.3 million, or 5.8 per cent of the payroll, 75 per cent of the upper limit of the equalisation provision and 107 per cent of the target zone upper limit. The company’s equalisation provision totalled EUR 986.0 million. Around two thirds of the equalisation provision is related to the disability pension business and the remaining one third to the contribution loss.


44

Risks inherent in the company’s insurance portfolio structureWhen preparing the calculation bases, the insurance contribu-tion and technical provisions are dimensioned according to the companies’ average insurance portfolio. In addition, TyEL contains a provision according to which, in the case that techni-cal provision calculation bases prove to be insufficient for all pension institutions, the increase in technical provisions result-ing from changing the calculation bases shall be covered in such a way that it does not entail a risk for an individual pen-sion institution. The insufficiency can, however, only concern one individual pension insurance company. The underwriting business under the company’s own responsibility thus involves the risk that its insurance portfolio structure deviates from the industry average in an adverse direction.

The old-age pension business involves the risk that the aver-age life span and thus the pension span in the company’s insur-ance portfolio are longer than expected when determining the calculation bases. In the old-age pension business, random fluctuations are minor, and significant, systematic differences in insurance portfolios are unlikely where companies with nation-wide operations are concerned.

There may be systematic company-specific differences in dis-ability pension incidence when, for example, the company’s operations are limited to a narrow geographical area of if the sector distribution of the insurance portfolio deviates from the average. The unemployment pension business involved a simi-lar company-specific risk, but as this type of pension is gradu-ally being phased out, this risk has all but disappeared.

It is against the law to use risk selection as a means of risk management in earnings-related pension insurance business, in other words, insurance must be granted to a company having an obligation to take out insurance. This increases the risks inherent in contribution loss, in particular.

If the result of an individual pension insurance company is systematically lower than that of the others, the company’s equalisation provision decreases but the contribution is not increased. If the equalisation provision has fallen below its lower limit, it is supplemented from the solvency capital, which lowers the company’s solvency and reduces future client bonuses. The primary bearer of the risk is thus the pension insurance company in question.

Ilmarinen’s insurance portfolio’s age and distribution struc-ture do not deviate from the average. The company’s equalisa-tion provision is larger than the average even in relation to the company’s size. Thus, Ilmarinen does not face the risk of a deviating insurance portfolio.

Risks inherent in jointly financed pensionsThe pension institutions are jointly responsible for the unfunded pension expenditure (pooled pension expenditure), of which the share of the pensions being paid out is financed by an annually collected pooled component contained in the TyEL contribution. The provision for pooled claims included in the technical provisions of each pension institution serves as a buffer for the underwriting business under the joint respon-sibility of the pension institutions.

The pay-as-you-go pensions and pooled premiums written are pooled between all of the pension institutions according to the size of their operations, determined by the insured payroll. The responsibility of the pension institution is limited to the pooled premiums written and the provision for pooled claims contained in the insurance contribution. Jointly financed pen-sions do not pose any risks to individual pension institutions.

A common risk to the pension institutions is created by a deterioration in the ratio between the jointly financed pension expenditure and the total payroll of the private sector, with respect to the assumptions used in determining the insurance contribution. In 2010, a life expectancy coefficient was added to the pension system. It reduces commencing old-age pen-sions in proportion to the increase in average life expectancy. This mechanism largely eliminates the risk related to the pay-as-you-go pension expenditure caused by the increase in life expectancy.

Factors that may lead to the materialisation of the risk inher-ent in an increased ratio of the pay-as-you-go pension expend-iture and payroll are an unexpected increase in index incre-ments in relation to real earnings, due to increased inflation or the work contribution proving to be smaller than expected due to demographic factors or unemployment. The law requires that the pooled component of the contribution is calculated so that it is sufficient with respect to the jointly financed expenses. The bearers of the risk inherent in an increased pooled com-ponent are thus the future contribution payers together – insured and policyholders in equal proportions – and the risk does not concern individual companies or other pension insti-tutions.

Provision for future and current bonusesThe technical provisions also include a provision for future bonuses, a provision for current bonuses and an equity linked provision for future and current bonuses.

The provision for future bonuses is accrued or reduced annually in the financial statements by the book result of investment operations, which is obtained by deducting the return requirement on technical provisions from the net accounting income. That means that it does not include changes in valuation gains or losses other than those entered in the accounts. The provision for future bonuses is included in the solvency capital intended to balance out the risks inherent in investments. The provision for current bonuses includes the client bonuses that will be distributed in the following year as discounts on the insurance contribution.

In the beginning of 2007, the solvency regulations were amended so that part of the pension institutions’ equity risk was passed on to the pension system. This was done by linking part of the return requirement on technical provisions to the development of equity returns. That way, the technical provi-sions also partly serve as a buffer against fluctuations in the investment result. The equity linked portion is 10 per cent of the technical provisions used in solvency calculation.

The linking is done through a specific technical provision item, the equity linked buffer, the annual change of which cor-responds to the development of equity returns. This compo-


45

nent of technical provisions develops in the same way in all pension institutions and can increase their technical provisions by a maximum of 5 per cent or reduce them by a maximum of 10 per cent.

Return requirement on technical provisionsIn the long term, technical provisions must deliver at least a return which equals the weighted average of the technical inter-est rate specified in the TyEL calculation bases and the return on equity investments, the latter having a 10 per cent weight. The technical provisions for the pensions under the company’s responsibility are credited annually with a 3 per cent fund rate and a return according to the pension liability supplementary factor, and the provision for pooled claims and the equalisation provision by a return according to the technical interest rate. In addition, the development of the equity linked buffer is tied to the average return on equity of pension institutions.

The pension liability supplementary factor, which portrays the long-term return on investments, is based on the pension institutions’ average solvency ratio (solvency capital in relation to technical provisions, from which the provision for future bonuses is deducted for the purposes of this calculation). The return according to the supplementary factor is used to increase the funded old-age pensions. If the equity linked buffer exceeds 5 per cent of the technical provisions used in the calculation, the exceeding amount is also used to increase funded old-age pensions.

The technical interest rate is also based on the pension insti-tutions’ average solvency ratio. The technical interest rate is used as the interest rate for insurance contributions, the pay-ments related to the clearing system between the pension insti-tutions and the Finnish Centre for Pensions and for certain technical provision items.

In 2012, the total return requirement calculated on Ilmarinen’s technical provisions was 4.7 per cent, of which the return tied to the equity linked buffer was 1.3 per cent. A 3.3 per cent return was credited on the remaining technical provi-sions.

Structure and duration of technical provisionsIlmarinen’s actual pension liability (technical provisions excluding provision for future bonuses and equity linked buffer) is expected to increase by about 4 per cent annually during the next few years. About 70 per cent of the technical provisions are of a duration of more than 10 years and about 40 per cent of a duration of more than 20 years. The technical provisions must be covered at all times with assets according to the regulations. The financial statements for 2012 showed a total of EUR 29,939 million of such assets suitable for covering

the technical provisions, which exceeded the amount of techni-cal provisions to be covered by around 17 per cent.

The structure of Ilmarinen’s TyEL insurance technical provi-sions in the financial statements was as follows:

Financial statements 31 dec 2012

Financial statements 31 dec 2011

Eur million %

Eur million %

Future old-age pension liability 12,568 51.2 12,242 52.0

Future disability pension liability 398 1.6 363 1.5

Current old-age pension liability 6,285 25.6 5,795 24.6

Current disability pension liability 1,416 5.8 1,441 6.1

Current unemployment pension liability 1 0.0 13 0.1

Equalisation provision 967 3.9 977 4.1

Provision for pooled claims 2,920 11.9 2,735 11.6

total (tyEl, other than provision for future and current bonuses) 24,555 100.0 23,567 100.0

Provision for future bonuses 478 406

Provision for current bonuses 62 55

Equity linked buffer 167 -155

total tyEl insurance 25,262 23,873

Other than TyEL insurance technical provisions 324 332

total technical provisions 25,586 24,205

5. invEstmEnt risK managEmEnt and Financial risKs

objectives of investment operations In the long term, investments must generate a return equalling at least the return to be credited on technical provisions. The risk faced by a pension institution in its investment operations is that if its long-term investment returns were to lag behind the average return of all pension institutions, this would weaken its solvency. As far as the equity-linked technical provisions are concerned, the company can reduce the risk by investing a corresponding share of its investment assets in equity, whereby the risk faced by the company is limited to the deviation of its own equity portfolio from the average return of pension institu-tions.

Solvency management’s relation to investment planning and risk management The statutory lower limit for solvency capital, solvency limit and other control limits depend on the extent of the company’s risk-taking in investment operations and take into account the different investment asset structures of pension institutions. Riskier investments require greater solvency capital.

The basic quantity of the solvency requirements is the sol-vency limit. The theoretical base for its dimensioning has been


46

determined in such a way that, within one year, the likelihood of a drop higher than the solvency limit taking place in the company’s investment portfolio is at maximum 2.5 per cent. However, the solvency limit is always at least 5 per cent of the technical provisions used in solvency calculation. The riskier the investment allocation of the pension institution, the higher the solvency limit. For calculating the solvency limit, the invest-ments are divided into five main groups that each have several sub-classes. The aim is that the main groups and sub-classes form entities with essentially the same return and risk charac-teristics. In addition the correlation between investments is taken into account in the calculation. According to permanent legislation, the lower limit for solvency capital is two thirds of the solvency limit.

According to the temporary solvency legislation expiring at the end of 2012, the solvency capital includes a portion of the provision for pooled claims which corresponds to 4 per cent of the technical provisions on which the solvency calculation is based. In addition, the minimum amount for solvency capital is 2 per cent of the above-described technical provisions, regardless of the investment allocation.

If the company’s solvency capital is lower than its minimum amount but higher than half of the minimum amount, the com-pany must immediately submit to the Financial Supervisory Authority a recovery plan to strengthen its financial position, i.e. a plan detailing how the company’s solvency can be restored. The same applies if the solvency capital plus the amount by which the equalisation provision exceeds its mini-mum amount lies below the solvency limit. If the solvency cap-ital is less than half of its minimum amount, the company must immediately submit to the Financial Supervisory Authority a short-term financing plan.

At the beginning of 2013, the temporary act will be discon-tinued and the new solvency regulations will come into force. The key change is that the earnings-related pension company’s solvency capital will include both the present solvency capital and the equalisation provision, which is a buffer fund collected to hedge against the insurance risks under the company’s own responsibility. In future, insurance risk will be taken into account in addition to investment risk in calculating the sol-vency limit that describes the capital requirement.

Solvency capital and risk appetite Pension insurance companies must maintain their ability to pay current and future pensions under their responsibility, which is why investment operations must be profitable and sustaina-ble. Profitable investing necessitates exposure to investment risks, which are restricted by the sustainability requirement. The financial risks inherent in investment operations are lim-ited by the statutory solvency regulations and the company’s internal limit framework, which contribute to ensuring a suf-ficient level of diversification and liquidity of the investment portfolio. In practice, however, the investment risk manage-ment process is about continuously identifying and analysing financial risks and making decisions on specific risk manage-ment measures.

The company’s solvency capital, which is the difference between the company’s assets and liabilities, served as a buffer

against investment risks in 2012. The most important items in the solvency capital are the company’s capital and reserves, provision for future bonuses and the valuation gains/losses on investments. The solvency capital acts as a buffer against fluc-tuations in the investment result. If investment income exceeds the interest to be credited on technical provisions, the differ-ence is added to the solvency capital. In the opposite scenario, the necessary amount is deducted from the solvency capital.

Ilmarinen’s investment portfolio allows a maximum 5% like-lihood of a reduction in the solvency capital to the solvency limit within two years. The aspects assessed are the expected return on the various investment classes, fluctuations in return and dependencies between asset classes. The risk level of the investment portfolio is assessed using an in-house developed investment market simulation model.

Ilmarinen’s solvency capital at the end of 2012 was EUR 5,752 (4,809) million and its solvency limit was 11.1 (8.3) per cent of the technical provisions used in solvency calculation. Ilmarinen’s solvency ratio, i.e. the ratio of the solvency capital to the technical provisions stood at 23.9 (21.1) per cent. Ilmarinen’s solvency position, i.e. the ratio of the solvency cap-ital to the solvency limit was thus 2.16 (2.54). The solvency ratio describes the company’s risk-bearing ability and the sol-vency position portrays the risk taken by the company in rela-tion to its risk-bearing ability.

authorisations, supervising and reporting in investment operationsThe Board of Directors confirms the authorisations for opera-tional investment activities annually in conjunction with the investment plan. The management, within the framework of its investment authorisations, may deviate from the weightings for the asset classes specified under the basic allocation. The extent of the risk related to the basic allocation and investment operations is monitored by the Asset Management Group, whose members represent the Investments division and the Finance, Actuarial Services and Risk Management division. In its monitoring, the group takes into account the requirements set for the underwriting business and proposes adjustments to the risk level of the basic allocation or to the investment authorisations, if necessary.

The chosen operative risk level and the company’s solvency situation are evaluated at the weekly Investment Committee meetings, in which the Risk Management division is also rep-resented. Compliance with the limits for investment risk-taking and the achievement of investment targets are reported to the Board of Directors monthly by the Risk Management division, which is independent of the function taking the investment risk. The accuracy of the reported information is ensured by sufficiently frequent real-time reporting, regular matching rou-tines and the organisational differentiation of decision-making on investments and reporting.


47

Risk assessment and risk management methods

MaRKeT RISKSMarket risk arises as a consequence of the daily changes in prices and values on the financial market. The market risks directed at Ilmarinen’s investment assets are equity, interest-rate, interest-rate-differential, real estate, currency, commodity and volatility risks. Market risks are measured using the Risk-Metrics ® risk calculation software. Market risks are limited by setting limits on maximum losses occurring with a certain likelihood (Value at Risk, VaR). Further aspects to be taken into account in investment risk management are the ever-present possibility of new risk factors emerging and the narrow per-spective of the risk calculation based on historical time series data. For these reasons, financial risk analysis must be con-tinually supplemented by stress tests and scenario analyses to support decisions concerning the investment portfolio compo-sition.

The table below illustrates the effects of market changes on Ilmarinen’s solvency:

change in equity prices

-10%

current value of real estate

-10%

Effect

on solvency capital (EUR million) -570.9 -342.6

on solvency position -0.13 -0.14

on return percentage (percentage points) -3.1 -1.3

on solvency ratio (percentage points) -2.4 -1.4

If the investments on 31 December 2012 are taken as the start-ing point, there was a 2.5 per cent likelihood that the value of the investments could drop by at least EUR 1,505 million within one month. This Value at Risk was 5.1 per cent of the amount of investments and 26.2 per cent of the solvency capi-tal at the end of the year. If such a risk had actually material-ised, the solvency capital would have dropped to 19.0 per cent of the technical provisions.

CReDIT RISKCounterparty risks relating to bonds are managed through analyses of the issuers’ credit ratings and by restricting both the total amount of investments in bonds of specific credit ratings and the percentage of bonds issued by a single issuer.

The primary instruments of managing credit risks in direct lending are company analyses and lending in proportion to the company’s future solvency. The risks are also managed through collateral arrangements.

The counterparty risks of OTC derivatives are managed both in accordance with risk reporting under regulations issued by the authorities and through more detailed counterparty-spe-cific market risk simulations. Counterparty risks relating to non-standard derivatives are also managed by using interna-tional standard agreements approved by the International Swaps and Derivatives Association (ISDA) with all parties.

LIquIDITy RISKS In a pension insurance company, liquidity risks in relation to the company’s liabilities are easily managed, as pension expenditure can be forecasted quite accurately, more than 67 per cent of the assets consist of liquid investments in securities and taking on debt is not allowed. Short-term liquidity risks based on the poor convertibility of investment instruments are managed by making the company’s own investments propor-tional to their average daily turnover in the market by invest-ment object.

Investment portfolio allocation by asset classThe breakdown of investments into main asset classes on 31 December 2011 and the income from these investments are presented in the notes to the accounts under “Key figures and analyses”. The table below follows the method agreed together with the pension institutions on describing investment returns and risks.

The modified duration of bonds on 31 December 2012 was 0.7 (0.2) years.


48

market value risk breakdown return volatility

Eur million % Eur million % % %

Fixed-income investments 13,054.2 44.2 13,547.5 45.9 6.9

Loan receivables 2,352.0 8.0 2,352.0 8.0 3.4

Public corporation bonds 4,013.1 13.6 2,797.9 9.5 2.6 2.4

Other bonds 4,712.5 16.0 -18.4 -0.1 13.5 2.4

Other money market instruments 1,976.6 6.7 8,415.9 28.5 1.9

Equity investments 11,328.7 38.4 10,829.1 36.7 9.5

Listed equities and shares 9,168.3 31.1 8,668.7 29.4 9.1 14.8

Private equity investments 1,353.8 4.6 1,353.8 4.6 15.4

Unlisted equities and shares 806.6 2.7 806.6 2.7 5.4

Real-estate investments 3,465.7 11.7 3,465.7 11.7 5.1

Direct real estate investments 2,942.9 10.0 2,942.9 10.0 5.6

Real estate funds and joint investments 522.8 1.8 522.8 1.8 2.2

Other investments 1,671.7 5.7 1,678.1 5.7 5.1

Hedge fund investments 349.9 1.2 349.9 1.2 7.7 6.8

Commodity investments -1.1 0.0 15.1 0.1 -

Other investments 1,322.8 4.5 1,313.0 4.4 -

Total investments 29,520.4 100.0 29,520.4 100.0 7.5 4.3

Breakdown of ilmarinen’s investments into solvency groups pursuant to the solvency act

groupExpected return

%volatility

%investments, %

31 dec 2012

I 3.8 1.3 17.0

II 4.7 5.5 15.7

III 7.0 10.2 11.6

IV 8.9 20.9 36.5

V 5.8 9.9 19.2

Breakdown of investments in listed equities and shares share %

2012 2011

Finland 35 40

Europe 30 26

USA 11 13

Japan 3 4

Other 20 17

Breakdown of credit rating of bonds including fixed-income funds share %

2012 2011

AAA 42 50

AA 6 6

A 15 15

BBB or worse 32* 26*

Not rated 5 2

* the share of fixed-income funds is 6 (6) percentage units

Breakdown of loan portfolio by collateral


Real securities 1,103.8 1,340.7

Guarantees 684.1 793.0

Loans to guarantor corporations 3.2 3.9

Unsecured 542.5 636.2

Interest receivables 18.3 22.8

Total 2,352.0 2,796.6

structure of real estate investments share %

2012 2011

Residential 19 19

Office 32 32

Commercial 10 8

Hotel 9 9

Warehouse 8 8

Other 8 9

Indirect investments 15 15

The occupancy rate of the real estate portfolio (locations under renovation excluded) was 88.8 per cent (92.6%).


49

6. opErational risKs Operational risks refer to the probability of loss inherent in inadequate or failed internal processes, human resources and systems or external events. Operational risks include legal risks but not business risks. Losses arising from operational risks can not always be measured in money; they can manifest them-selves indirectly, for example through a deterioration of the company’s reputation.

The majority of operational risks are managed as part of the management of the business units’ normal operations, under the responsibility of the head of each unit. The objective is for the operations of each unit to be carefully performed, maintain a high quality, and be economical and efficient. The most important risk factors relating to the operations have been assessed and identified, and they are managed under the com-pany’s risk management operations.

The most serious operational risks in terms of the company’s basic task are errors and disturbances that could prevent the correct calculation or timely payment of pensions. They also include disturbances in the operational information systems and the service provision of online services that are growing in importance, which compromise their performance, manage-ment or security.

The management of significant operational risks has been taken care of by ensuring the personnel’s expertise and employ-ing a range of means relating to information technology and operating practices, such as backup systems and backup com-munication connections, as well as the use of benchmark data and monitoring systems.

In order to ensure disturbance-free operations under both normal and exceptional conditions, the company has drawn up plans for ensuring the continuity of operations and for control-ling operations in exceptional circumstances, and they are monitored and maintained every year to keep them up-to-date. The critical functions to be safeguarded have been chosen from the critical functions mentioned in the Insurance Industry Pre-paredness Guidelines.

7. rEputation risKsReputation risk is the possible deterioration of the company’s reputation among the various stakeholders leading to business losses. The materialisation of the risk is the result of a signifi-cant risk event in some other risk class. In the worst-case sce-nario, it can essentially weaken the company’s possibilities to operate independently.

Proactive communications are used to prevent the materi-alisation of reputation risks. If such a risk does materialise, communications will help minimise its impact on the compa-ny’s operations. Ilmarinen has a crisis communications plan in place to support its operations.

8. most important stratEgic risKsThe most important strategic risks related to Ilmarinen’s operations are identified and assessed by the company’s Executive Group. Ilmarinen’s business risks are identified and assessed as part of this mapping of the most important strategic risks. Responsible persons have been assigned from the Execu-tive Group for each identified risk, and it is their duty to ensure the sufficiency of risk management means and the implementa-tion of necessary development measures.

According to the assessments made, strategically significant risks can materialise in particular in connection with the fol-lowing events or activities relating to Ilmarinen’s operations:• significant changes in the operating environment• development of service and operating models• partnerships • investments• set-up and maintenance of information systems serving the

business processes.

9. continuous dEvElopmEnt oF risK managEmEntRisk management is being developed continuously, just like the rest of the organisation; risk assessments are made regularly according to normal management analysis and reporting. Risks are assessed and managed on the organisation’s strategic, operational and project levels. The purpose of risk management is to promote the achievement of goals. This provides the back-drop for the development of both procedures and corporate culture. Risk management also involves continuous interaction with external and internal stakeholders.

It is important for Ilmarinen that the level of risk manage-ment procedures is in line with the significance of the opera-tions concerned and the decisions made within them. This is meant to ensure that Ilmarinen’s risks are on an optimal level in view of the criteria defined by the company. Risk manage-ment leads to Ilmarinen having an up-to-date, accurate and all-encompassing picture of the company’s risks, which are in line with the company’s risk appetite.

ILMARINEN IN 2012 Proposal of the Board of Directors for the disposal of profit

50

The parent company’s distributable non-restricted equity in the financial statements for 31 December 2012 amounts to EUR 63,259,915.17, of which the profit for the accounting period is EUR 3,018,462.34.

PROPOSAL OF THE BOARD OF DIRECTORS FOR THE DISPOSAL OF PROFIT

Helsinki, 27 February 2013

Jussi Pesonen

Lauri Lyly Jyri Häkämies George Berner

Sture Fjäder Kim Gran Matti Halmesmäki

Leila Kostiainen Hannu Leinonen Leena Niemistö

Kristian Pullola Heikki Vitie Harri Sailas President and CEO

The Board of Directors proposes that EUR 50,000.00 be reserved for use by the Board of Directors as donations for purposes of general interest and the remainder of the profit, EUR 2,968,462.34, be transferred into the contingency fund.

ILMARINEN IN 2012 Auditor’s Report

51

AUDITOR’S REPORT

We have audited the accounting records, the financial state-ments, the Report on Operations, and the administration of Ilmarinen Mutual Pension Insurance Company for the finan-cial period 1.1.−31.12.2012. The financial statements comprise the consolidated balance sheet, income statement and cash flow statement and notes to the consolidated financial state-ments, as well as the parent company’s balance sheet, income statement, cash flow statement and notes to the financial state-ments.

rEsponsiBility oF thE Board oF dirEctors and thE managing dirEctorThe Board of Directors and the Managing Director are respon-sible for the preparation of financial statements and Report on Operations that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements and the Report on Operations in Finland. The Board of Directors is responsible for the appropriate arrange-ment of the control of the company’s accounts and finances, and the Managing Director shall see to it that the accounts of the company are in compliance with the law and that its finan-cial affairs have been arranged in a reliable manner.

auditor’s rEsponsiBilityOur responsibility is to express an opinion on the financial statements, on the consolidated financial statements and on the Report on Operations based on our audit. The Auditing Act requires that we comply with the requirements of professional ethics. We conducted our audit in accordance with good audit-ing practice in Finland. Good auditing practice requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the Report on Operations are free from material misstatement, and whether

the members of the Supervisory Board as well as of the Board of Directors of the parent company or the Managing Director are guilty of an act or negligence which may result in liability in damages towards the company or have violated the Limited Liability Companies Act, the Employee Pension Insurance Companies Act, the Insurance Companies Act or the articles of association of the company.

An audit involves performing procedures to obtain audit evi-dence about the amounts and disclosures in the financial state-ments and the Report on Operations. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements and Report on Operations that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the over-all presentation of the financial statements and the Report on Operations.

We believe that the audit evidence we have obtained is suf-ficient and appropriate to provide a basis for our audit opinion.

opinion In our opinion, the financial statements and the Report on Operations give a true and fair view of both the consolidated and the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the Report on Operations in Finland. The information in the Report on Operations is consistent with the information in the financial statements.

to thE annual gEnEral mEEting oF ilmarinEn mutual pEnsion insurancE company

Helsinki 13 March, 2013

Ernst & Young OyAuthorized Public Accountant Firm

Tomi EnglundAuthorized Public Accountant

Documents

FINANCIAL STATEMENTS - vuosikertomus.ilmarinen.fivuosikertomus.ilmarinen.fi/.../files/documents/ilmarinen_tp11_en_v09… · ILMARINEN IN 2012 Report on operations 3 REPORT ON OPERATIONS