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EP211 · Economy · first published 2023-09-13

The State Pension Fund and five near-crises | Timo Löyttyniemi | Negotiator 211

Timo Löyttyniemi, CEO of the State Pension Fund of Finland (VER), joins Sami Miettinen in September 2023. The episode is an unusual combination: the same person raised the funding ratio of Finnish state pensions from 8 per cent to roughly 25, and sat on the EU Single Resolution Board building bail-in to replace bail-out. That produces two time horizons on one subject — a fund already turned into run-off, and a banking system that came close to systemic crisis five times in a single year. The most interesting part is what Löyttyniemi questions inside his own industry: whether the solvency capital of the Finnish TyEL system has an economic rationale, and whether it is procyclical. The transcript is auto-captioning, which is disclosed.

Sami Miettinen · Sections: AI and the Economy + AI and Society

The State Pension Fund and five near-crises | Timo Löyttyniemi | Negotiator 211

Summary: Timo Löyttyniemi, CEO of the State Pension Fund of Finland (VER), joins Sami Miettinen in September 2023. The episode is an unusual combination: the same person raised the funding ratio of Finnish state pensions from 8 per cent to roughly 25, and sat on the EU Single Resolution Board building bail-in to replace bail-out. That produces two time horizons on one subject — a fund already turned into run-off, and a banking system that came close to systemic crisis five times in a single year. The most interesting part is what Löyttyniemi questions inside his own industry: whether the solvency capital of the Finnish TyEL system has an economic rationale, and whether it is procyclical. The transcript is auto-captioning, which is disclosed.

Guest, disclosure and source note

Timo Löyttyniemi is CEO of the State Pension Fund of Finland (VER). Before that he ran KOP’s Prospectus investment bank, wrote a doctoral thesis titled Essays on Corporate Capital Structure Decisions, and from 2015 served on the EU Single Resolution Board in Brussels. The recording is 13 September 2023.

Three disclosures, better made up front:

1. A fund already turned around

When VER was founded, Finnish state pensions were barely funded at all — the ratio was about 8 per cent. Under Löyttyniemi it has been raised to roughly 25 per cent.

That is the episode’s first point, and it is an encouraging answer to an entirely different debate: the crisis in YEL (self-employed persons’ pension) funding. If the state pension system could quadruple its funding ratio, the problem is not unsolvable in principle.

But the fund is in a different phase now. VER no longer grows. It is in run-off: capital is being returned from the fund to pay pensions, net cash flow is roughly €400 million a year negative, and annual state pension payments are about €5 billion. The fund was sized as a buffer, not as a payer.

This has a direct investment-policy consequence that is easy to miss: a shrinking portfolio tolerates less illiquidity. That is why VER holds fewer illiquid investments than, for example, the TyEL system. It is not a view on asset classes but a consequence of the direction of cash flow.

2. Where the returns actually came from

Löyttyniemi’s answer is unromantic: from adding equity risk. VER’s equity weighting was raised from zero to 40 per cent and from there to 51 per cent. The historical returns in the billions followed mostly from that single decision, not from choosing between stocks.

An observation attached to this runs against the textbook. In theory an ageing population should show up as equity risk being sold — that is what the life-cycle model says. It has not happened. Löyttyniemi’s partial explanation is that wealth is being accumulated for inheritance: the investment horizon is not one’s own lifespan but the next generation’s.

Sami sets his own British funded pension alongside this as an example of how very different systems get discussed under one word.

One topical question is left genuinely open: the zero-rate world is over — will interest-bearing annuities start working again? Neither claims to know.

3. International comparison is harder than it looks

The comparison of pension systems is a cautionary example of how the same number means different things in different countries.

The same warning repeats in the Danish pension crisis of 2022. The headline was ATP’s −40.9 per cent loss. Löyttyniemi’s correction is the essential part: the loss applied only to the risk-capital portion, not to total pension assets. The number was correct and still gave a false impression.

4. The sharpest point: is there a rationale for solvency capital?

Here Löyttyniemi asks two questions about the structure of his own industry that are rarely heard from inside it:

  1. Does the solvency capital of the TyEL system have an economic rationale?
  2. Is it procyclical?

The argument is structural, not an opinion. Solvency regulation was built to control counterparty risk — no single pension company may fall over. But when every counterparty follows the same rule at the same time, the rule forces selling risk when the market is down and permits buying when it is up. What dampens one actor’s risk can amplify the cyclicality of the whole system.

The shift Löyttyniemi proposes is therefore from per-counterparty thinking to whole-system thinking. The reform of YEL belongs to the same question: it decides who carries the risk, not merely how large a buffer is held.

For the purposes of this article this is the episode’s most valuable content, because it is a testable claim rather than a forecast.

5. Bail-out → bail-in: what was built at the Resolution Board

Löyttyniemi was in Brussels from 2015, when bail-in, as set out by the Basel FSB, replaced bail-out as the primary resolution model for banking crises. The structure has three parts:

The idea is simple and politically heavy: losses fall first on owners and creditors, not on the taxpayer.

Sami describes his own change of mind here. At the time of Greece’s roughly €100 billion bail-out package his position on the euro was severe; under today’s bail-in regime it is more moderate. The justification is not sentiment but balance-sheet figures:

As far as banks are concerned, the euro system is clearly less risky than it was before the crisis. This is the rarest thing in the episode: a change of position with the numbers attached.

6. Credit Suisse — when the playbook was departed from

In the 2023 UBS merger, Credit Suisse’s CoCo (AT1) instruments were written to zero while equity retained value. That is the reverse of the order the European bail-in playbook requires, and the euro system responded publicly.

Löyttyniemi’s explanation is technical rather than moralising: national differences and instrument-level terms decided it. AT1 documentation is not the same everywhere, and Switzerland is not in the banking union.

The investor lesson is direct and generalisable: the hierarchy you rely on lives in the documentation, not in market convention.

7. SVB: all the information was public

The failure of Silicon Valley Bank is treated as three parties being wrong at once — investors, the bank’s management, and the supervisors.

What matters for this episode is fair-value pricing: the bank’s interest-rate risk was visible in its own reporting, but it did not flow through to the income statement, and investors did not read it. The information was public and still unpriced.

The more general risk that follows: a rising yield curve moves valuation risk across the banking system in the same direction at the same time, and a deposit run is now digitally faster than any twentieth-century model assumes.

8. Three ways a system changes

Löyttyniemi’s framing is tidy and usable:

  1. Architecture changes because of a crisis — regulation reacts after the fact.
  2. A market shift in the behaviour of investors and of banks’ customers.
  3. Something new, such as the digital euro.

Sami’s response to item 3 is critical: central bank digital currency creates the very risk it is meant to manage. If central bank money is directly available to citizens, the fastest route for a bank run is built into the system.

Item 2 is already under way. Money market funds work as a substitute for deposits. Löyttyniemi’s own position is that there is no reason to hold zero-duration overnight money in a bank account when the same risk earns a positive money-market yield. He adds that these funds are less risky than they were before the financial crisis.

Sami’s analogy is the most vivid thing in the episode: you can carry your phone number from one operator to another, but switching is heavier in the banking system. Banks are not uniform in deposit risk, yet the customer’s friction in moving is large — and that friction is exactly what makes deposits stable. Remove the friction and the stability goes with it.

9. The rate picture in September 2023

Löyttyniemi’s reading of the moment, underlying his VER blog posts:

Sami’s formulation of Europe’s position: we are dragged along behind the Americans “kicking and screaming” — the yield curve gets copied even as Germany creaks.

10. Five times on the brink of systemic crisis

This is the spine of the episode and its best summary. Within one year, by September 2023:

  1. The energy crisis. The actual problem was not the price of energy but collateral requirements on derivatives exchanges — central counterparties called for margin at a pace energy companies could not meet. The German state took over Uniper.
  2. The UK pension fund crisis of September 2022. The government’s budget statement pushed the long gilt yield from three per cent to five, and LDI structures forced funds to sell precisely what was falling. On an estimate Löyttyniemi cites, without the Bank of England’s asset purchase programme the yield would have reached 7–8 per cent.
  3. Silicon Valley Bank.
  4. Signature Bank.
  5. Credit Suisse.

(A crypto crisis fell in between, which Löyttyniemi dismisses as small in the big picture.)

All five share one feature: public authority was needed to resolve them — a state or a central bank. Löyttyniemi’s conclusion is that the measures were well-timed and probably necessary; had even one been left to the market, the consequences could have been nasty.

There is an honest tension here that the episode does not hide. Bail-in was built precisely so the taxpayer would not pay — and yet every one of the five was resolved by the public hand. The system is designed to work without a rescuer, and has not once been tested without one.

11. Finally: the inverted curve and the speed of adjustment

Löyttyniemi raises the inverted yield curve — short rates above long — and notes it is a historically reliable recession signal: in practice a recession always follows.

But he does not end in gloom, and the reasoning is structural: a market economy adjusts. Demand falls, supply adapts, prices correct. The difference between countries is not whether adjustment happens but how fast.

That produces the episode’s final comparison, which runs in both directions:

And attached to that is a misconception Sami corrects: in the euro area people imagine that a 120 per cent federal debt could be layered on top of the existing 90 per cent, US style. It does not work that way. In the US the federal debt is large but state-level debts are very small — Finland would never end up at a 15 per cent debt ratio. The comparison only holds if both layers are counted.

Löyttyniemi’s closing comment is a long-horizon one: the euro area is young, and even the United States has a couple of centuries of structure-building behind it.

Löyttyniemi’s VER blog: https://www.ver.fi/fi-FI/Julkaisut/VERin_blogi

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