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Finland plans shake-up of pension rules

The Finnish ministry of social affairs and health is drafting a new set of regulations for the country's pensions sector and will publish a timetable of the reform process later in the year. In January, Erkki Rajaniemi, ministerial counsellor for legal affairs at the ministry, reported on the shortcomings of the existing regulatory system and emphasised the need to facilitate competition between company pension funds and pension companies.

After consultations with the industry, which took place in March, the ministry is now drafting a new set of regulations and a timetable for implementing them.

The ministry is expected to publish its conclusions in early autumn. The recently appointed government of prime minister Matti Vanhanen has stated it will promote competition in the work pensions system.

Rajaniemi said that he had made a number of specific recommendations that seek to improve competition in the market. "We found that the existing regulations treated pension funds differently from pension companies, and we tried to address these inequalities," he said.

"My report recommended changing the rules for the transfer of assets between pension institutions. I proposed that the time limit on transferring assets should be reduced from five years to two and that the rule, according to which assets can be transferred from a company to a fund for a minimum of 50 employees, should be abolished."

Rajaniemi also called for better transparency in the market and said that the new regulations should make it easier for investors to compare the financial figures of different pension institutions.

He also proposed tax relief to encourage investment in real estate and said that the ministry should monitor the effect of legislation on the competitiveness of the market.

Although Finnish pension funds have welcomed the move to revise the current regulations, many maintain that further action will be needed to resolve the problems in the industry.

Roland Ahola, managing director at €30m PlusHealth pension fund, points out that Rajaniemi disagreed on a number of issues with the Finnish Competition Authority (FCA), whose complaints led to the
commissioning of the report in the first place.

"By disagreeing with the FCA, Rajaniemi disagreed also with several pension funds, on a number of issues. For example, Rajaniemi proposed maintaining the obligation of pension funds to ask for the permission of their current pension provider before transferring assets to another institution," Ahola explained.

"Rajaniemi maintains that such a relaxation of rules is not necessary because so far no pension institution has resisted when a pension fund has wanted to transfer its insurance policies to another provider. This is not a very convincing explanation for preserving a rule that clearly impedes open competition."

Ahola also thinks that the decision to appoint Rajaniemi, who is an official at the ministry and a previous employee of the mutual pension insurance company Varma, to investigate the shortcomings of the ministry's own regulations is questionable. "This inability and unwillingness to ask for external and impartial advice is dubious. It is very odd the ministry did not let the FCA to investigate the matter."

Jouko Bergius, managing director at the Finnish Association of Pension Foundations, notes that several industry bodies and the FCA have criticised Rajaniemi's stance towards terminated insurance policies. "Pension funds are not allowed to have terminated insurances unlike pension companies. Today, terminated insurances form approximately 40% of the total capital of local pension companies and make a noteable contribution to their investment returns. On this basis, funds and pension companies are not competing on the same foothold," explains Bergius.

Rajaniemi proposed that the return exceeding liabilities, which investments from terminated insurances yield, will start to be transferred to mutual pension reserves only once the new laws will be in force. "Even then, the new rule will apply only to those insurances that will have been terminated after the laws came into force. This kind of regulation will maintain a structural disadvantage in the system," Bergius points out.

The FCA has also criticised the proposal of Rajaniemi not to change the model on the basis of which the amount of transferable solvency capital is calculated.

"The amount of transferable solvency capital should be counted on the basis of how the employer's funds have grown due to investments and contributions," Juhani Jokinen, director
general, and Arttu Juuti, head of research at the FCA said in their commentary on the report to the ministry.

However, instead of accepting the proposal of the FCA, Rajaniemi suggested that a third model for calculating the amount of transferable solvency capital should be developed.

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