Finland: Pushing for a solid foundation
A more competitive environment could increase the choice of pension providers for employers, writes APPF
In Finland, employers are under an obligation to provide their employees and their beneficiaries with the pension cover laid down in the Employees’ Pensions Act (TEL).
Employers have three choices for the provision of TEL pension cover:
p a pension foundation;
p a pension fund; or
p an employment pension insurance company.
The main differences between pension foundations and pension funds pertain to their administration.
Three types of pension foundation are in use in Finland:
p ‘A’ pension foundations provide voluntary additional pension cover and other benefits.
p ‘B’ pension foundations provide the statutory pension cover and benefits laid down in the TEL.
p ‘AB’ pension foundations provide both voluntary additional benefits (Division A) and statutory pension cover and other benefits (Division B).
TEL statutory pension cover versus voluntary additional pension cover
Employment pension cover for private sector employees mainly consists of statutory national pensions. In Finland, the significance of voluntary additional pension cover is considerably smaller than that in other European countries. Voluntary additional pension cover has, however, been important for older age groups because they did not come within the sphere of the full-scale TEL statutory pension cover.
In Finland, particular attention has been paid in pensions policy arrangements
during the current decade to the sustainability of financing for the employees’
pensions system. At the beginning of 1993 the employee’s pension contribution started and in 1994 this was made part of the fixed financing of the employee pensions system, in such a way that half of the changes to be made in the employee pension contribution were directed by law at the employee’s pension contribution.
An attempt was made to postpone retirement by means of changes relating to national pensions and employees’ pensions made in a flexible pension system at the beginning of 1994. At that time the lower age limit for an individual early retirement pension was raised from 55 years to 58. The conditions for receiving unemployment pension were also made more stringent. At the beginning of 1994, the pension’s growth factor for the last five years at work was also improved by raising it from 1.5% to 2.5%. This was in order to encourage people to continue at work until the age when they could draw the national retirement pension.
At the beginning of 1996, changes were made in the Employees’ Pensions Act which were intended to bring about equilibrium between employees’ pension contributions and benefits in the closing years of the 1990s. The objective was also that the pension would better correspond to the earnings of a person’s entire career. Thus the definition of the pensionable salary was changed so that the pensionable salary is calculated on the basis of earnings for the last 10 years of an employment relationship. The growth percentage for the period between a pension event and retirement age, that is for the future, was reduced to favour continuation in work by reducing the growth percentage from 1.5% to 1.2% between the ages of 50 and 60 and further to 0.8% of salary between the ages of 60 and 65.
The TEL statutory pension and voluntary additional pension cover are closely linked. For this reason it has also been possible to make changes in voluntary additional pension cover which correspond to those made in the national pension cover. In addition, the principle has been that there is no need to compensate TEL statutory pension deductions with additional pension cover.
Changes now pending
A government bill is currently being prepared at the Ministry of Social Affairs and Health, in which changes will be proposed in the regulation of the unemployment pension and the age limit for individual early retirement pensions and also in employers’ responsibility for the costs of disability and unemployment pensions. The intention is that with these amendments to the law and by means of the promotion of early rehabilitation and active employment procedures by the labour administration, it would be possible to promote the continuation at work of elderly persons and postpone their retirement.
Under the proposal, the regulation of the unemployment pension would be amended such that, in its calculation, the part of the pension to be calculated for the period between starting to draw the pension and the attainment of the statutory retirement age, that is the future period, would no longer be added.
Also under the proposal: the age limit for individual early retirement should be raised from the current 58 years to 60; the deductible sum for full-scale invalidity and unemployment pensions should be made uniform with the deductible sum for the current invalidity pension, in such a way, however, that 80% of the pension liability would be funded. In accordance with these changes, antedating deduction for an early retirement pension and the postponement supplement for a postponed retirement pension should be altered. The antedating deduction would be reduced to 0.4% for each antedated month and the postponement supplement would be reduced to 0.6% for each month of postponement of starting to draw the pension. The factorials are calculated such that cost neutrality would be attained as well as possible.
Corresponding changes can be made in voluntary additional pension cover. There is no need to compensate TEL statutory pension deductions with voluntary additional pension cover.
At the instigation of the association, the ministry has established a working party whose task is to prepare amendments to the Act on Pension Foundations. The work is divided into two phases such that at the beginning proposals are prepared for the most urgent needs for amendment which it would be necessary to bring into force at the start of next year. In the second phase the working parties would prepare changes intended to be implemented later.
Under the prevailing Act on Pension Foundations, only benefits-based additional benefits can be arranged at a pension foundation. Because the popularity of contribution-based additional benefits has grown vigorously in recent years, the association has started to investigate ways of arranging them in pension foundations.
The ministry has appointed two administrators to investigate competition conditions for the statutory employment pension system with the objective of promoting competition to support the activity and productivity of a dispersed system. The project is particularly important for pension foundation activity because the opportunity of an employer to freely choose where it arranges pension cover for its personnel is at the moment severely restricted. In practice it is almost impossible for an employer to transfer from an employment pension insurance company to the pension foundation alternative without financial loss.
The Association of Pension Foundations in Finland
Secretary General: Folke Bergström
Chairman of the Board of Governers: Eero Tuomainen
Address: Oksasenkatu 4 b A 11, 00100 Helsinki
Telephone: + 358-9-70039410
The Association of Pension Foundations in Finland, the joint organ of the pension foundations, was established in 1962. The Association’s office is in Helsinki. At the end of 1998 the Association had 99 members.
The Association’s most important lobbying tasks are:
p to make initiatives to develop legislation on pension foundations and to provide consultation on the application of the law
p to maintain contact with the authorities and with various organisations and institutions
p to inform its members of current events relating to pension foundation activity
p to arrange training and to give expert assistance
Throughout the 1990s, pension foundation legislation has been thoroughly amended. The most important project was then the new Act on Pension Foundations which for the most part came into force at the start of 1996. The Association has had representation in all projects amending the laws that have been implemented.