Finland's generous pensions system started in the 1920s and worked well for decades. Welfare provision grew rapidly in the 1960s and 1970s. But the problems facing other developed countries have prompted the government to introduce a series of reforms to both the structure and funding of pension schemes.

We couldstill have a problem in 10 years," said Kari Joutsa, director of the Apotekens E lakekassa fund. "The population is becoming older and social security is getting less and less. Our schemes need higher returns."

Finland's pension provision is comprised of two parts. The first is a basic flat-rate old age pension, paid since 1962 to residents by the social insurance institution and intended to provide minimum support to anyone unemployed. The second part, known as TEL, is a compulsory em-ployment pension plan, effectively a defined benefit scheme, partly fund-ed and partly pay-as-you-go, which accrues on the length of employment, earnings and age.

There are several pensions acts governing the structure and administration of employment pensions wheth-er in the public or private sector. The Central Pension Security Institute oversees and administers employment pensions. Statutory contributions from employers cover all em-ployees from age 14 onwards and since 1993, all employees have contributed. This compulsory element, giving virtually universal coverage, is similar to France and Switzerland. The funds are overseen by the em-ployer, the trade union (representing employees) and the government.

Employers have two funding alternatives: through an insurance company or from their own pension fund. Under employers insurance funds, pensionable salary is calculated as the average of the last 10 years salary. The maximum pension, including basic social security, is 60% of final average salary for a full 40-year career, which is roughly in line with the EU average.

The employment pension is also linked to the TEL index which follows the average changes in the level of wages and prices. An adjustment is made at the beginning of each year. The retirement age for men and women is 65 but early retirement can be taken from age 60 with proportional adjustments to benefits.

There is no refund of TEL-Basic contributions. Individuals must ap-ply to draw their pension which may be paid out retroactively for only one year. Finnish pensions may be paid abroad and foreign pensions will be paid in Finland if there is a social security agreement with the relevant country. Retirement costs account for some 11.5% of GDP, way beyond the 7% OECD average. One third is national pension cost.

There is a third strand of pension provision in Finland. Some firms offer voluntary private fully-funded pension plans to bring provision to 66% of final average salary for a full 40-year career. These plans are a small ($8bn) sector but are important for older employees whose pre-1962 service does not qualify for full benefit coverage under the compulsory occupational plan.

Ken Swain, general manager in Finland of Lombard International, says the private schemes are increasingly popular as a flexible way to top up the TEL-Basic. "You have to test carefully for over-funding but the authorities are welcoming new providers of unit-linked products into the market," he said

Private plans may be registered or non-registered. If registered they come under the same framework as the insurance or pension fund as the compulsory TEL plan. Higher benefits and different terms can be adopt-ed under an unregistered plan but tax treatment for contributions over a certain level is more restrictive. Em-ployee contributions to TEL or to voluntary plans within its framework are fully tax deductible.

Finland reviewed its pension system in the 1960s and took decisions then that are bearing fruit now. The first was that the system would remain partly funded so that generation would not have to pay twice. But a funding gap has opened up because a lower fertility rate and high unemployment (consistently above 12%) has meant fewer employees to pay in contributions.

By 1992, uncovered pension liability was estimated at 60% of GDP in the private sector alone. Under the TEL scheme, the combined financial assets of the pension institutions covered just 30% of future liabilities. The very situation the government wanted to avoid in the 1960s has come about.

"Basically, what we have now is the actively working population paying for those who are retired," said Tim Hermansson, managing director at Alfred Berg.

The government has responded by introducing reforms over the last eight years discouraging early retirement and promoting post-retirement age employment. In 1995 the retirement age was made age 65 for both the public and private sector (previously it was age 63 in the public sector). State retirement provision, which was actually higher than private schemes, was cut.

From January 1997, the national pension became dependent on what earnings-related employment pension the employee is entitled to. The reduced national pension will continue to be paid but will be cut by 20% each year.

The funding of Finnish pension schemes is also being overhauled. For years the development of the business sector was underpinned by the automatic re-lending of pension contributions to companies. According to a William M Mercer report, these loans originally represented over 60% of total investments of the funds but are now down to 35% due to the op-ening up of Finland's capital markets.

A 2.5% gap between the funding rate and the required rate of return has helped build a solvency buffer against projected volatility as funds increase equity holdings. Typically Finnish pension funds have invested mostly in government bonds and real estate. That is changing rapidly. They now have up to 15% in equities against just 5% in 1995; but that is still half the level of other Nordic funds and some way off the customary 60-80% in the Netherlands or UK.

"The two main trends for asset managers are that funds now heavily into fixed income will move more into equities and they will increase their holdings of international assets. They are ready to move into Europe because the euro means there will be lower currency risk," said Alfred Berg's Hermansson. Caroline Hall"