Finnish employers are under an obligation to provide employees and their beneficiaries with comprehensive pension cover under the terms of the Employees Pensions Act (TEL). So comprehensive is this scheme that the take-up of voluntary additional pension cover is significantly lower than in other European countries. The exception to this manifests itself a group of older workers who did not fully benefit from the TEL reforms.
The Finnish government had been concerned about the growing gap between pension payment and contribution income during the early 1990s, but has moved decisively during the past decade to close it. It has done this by encouraging workers to postpone early retirement, and even offered incremental bonuses to those over 65 who do not immediately take up their pension. Also, in 1994 the employees’ pension contribution was integrated into the fixed financing of the employee pensions system.
Earlier this year, as part of these reforms, the social affairs ministry recommended a shake-up of the institutional investment market, and looked at how pension foundations should operate. This is of particular importance for the transferability of funds. At the moment it is almost impossible for an employer to transfer from an employment pension insurance company to another vehicle such as a pension fund or foundation without suffering financial loss. The new proposals recommend that the assets of the working population should be portable, and to that end the government is keen to promote competition to improve and support a more diverse system.
The government has so far been successful in achieving most of the aims of the 1996 Act on Pension Funds, and current proposals look set to continue in the same vein. The emergence of almost 100 members of the Association of Pension Foundations in Finland also suggests that the competition sought by the government will be available once new legislation is in place.
The basic old age pension in Finland, supplemented by a compulsory earnings-related element, is available to persons aged 65 or over. The amount of old age pension under the national pension legislation depends on other pensions received by the pensioner, primarily the employment pension. Its value is also determined on a residential basis of at least three years from the age of 16.
Just over 1m pensioners receive benefits, according to the last available figures from Social Insurance Institution of Finland (KELA). That figure has remained fairly constant over the past five years, as successive attempts have been made to persuade Finns to postpone retirement, including the raising of the lower level for early retirement from 55 to 58; a further rise to 60 is planned.
Employment pensions can be based on both public and private-sector employment relationships as well as on self-employment. The public sector provides slightly better benefits than the private, but the gap is narrowing. All employees and self-employed people are covered under statutory employment pension insurance and are entitled to a pension under the employment pension acts under which they have been insured.
In an attempt to ensure that pensions correspond better to an individual’s career earnings, pensionable salary is now calculated on the basis of earnings for the last 10 years of employment relationships. Further adjustments to this calculation have also been implemented to encourage Finns to remain in work longer. Further changes to the law on unemployment and disability payments are also pending, and again their aim is to discourage older workers from leaving their jobs.
The total sum of employment pensions payable to an individual pensioner is limited by rules which cap the total pension at either 60% (private sector) or 66% (public sector) of the highest pensionable earnings or earned income from employment or self-employment lasting at least a full year.
Part-time pension payable under the employment pension legislation can be granted to employees aged 58 or over (a special age limit of 56 years applies during a trial period from 1 July 1998 until 31 December 2000) who are making a transition from full-time to part-time employment, provided that they do not at the same time receive an individual pension provided by law (survivor pensions are not taken into account). It is required that the working hours be reduced to 16–28 hours a week. The part-time pension is equal to 50% of the difference between regular and part-time earnings.
Within a few private schemes an additional pillar of provision is provided, but to date these are very rare in Finland. They must be fully funded and be provided by insurance companies or pension funds or foundations. There are three types of foundations: those that provide for this voluntary cover, those that provide statutory pension cover and other benefits laid down in TEL, and others that provide both. Because of the popularity of contribution-based additional benefits, the Association of Pension Funds is looking at ways of arranging them in a pension foundation.
Because the voluntary and statutory cover are closely linked, since 1996 the changes introduced to the former to encourage a longer working life have also been applied to the second pillar payments.
One of the most significant aspects of investment of funds has been the fact that it has been traditional in Finland to convert the funds into loans back to the companies. However, for obvious reasons, this is discouraged by the government. In the past as much as 60% of the fund’s value may have been invested in this way, and still can often amount to almost a third. The liberalisation of the capital markets has also played a part in this reduction.
Otherwise, funds are allowed to invest in a range of domestic and foreign instruments. Typically, although foreign bonds and equities are becoming more popular they remain a very small proportion of the funds compared with other European countries.
For the time being at least, the government seems to have allayed fears that an ageing population will be inadequately served by the pension system.