FINLAND - Third pillar defined contribution (DC) pension systems play a minor role in Finland, but the government should consider measures to encourage a more significant DC pillar in a bid to improve risk sharing between generations, the OECD has suggested.

In its latest Economic Survey on Finland 2010 ,the Organisation for Economic Reconstruction and Development (OECD) noted while the 2005 pension reforms were a "step in the right direction" the pension system needs further adjustments to lower fiscal costs.

It argued the Finnish government should raise the minimum retirement age from 63 to 65 and either increase or abolish the existing maximum retirement age of 68. That said, the OECD warned this needs to be combined with incentives encouraging older individuals to continue working. This could perhaps be achieved by tightened access to disability pensions and by abolishing the so-called "unemployment pipeline" available from age 57, that provides benefits and allows early retirement at 62 with no actuarial penalties.

The need to encourage people to work longer will not only help sustain the labour market, but the OECD noted that from 2010 new earnings-related pensions will be reduced in line with increased longevity, so retirement incomes in relation to wages will fall unless people work longer.

The OECD report also showed the Finnish pension system can be described almost entirely as a defined benefit (DB) system, which affects the risk distribution across the generations. A drop in asset values - as seen in 2008/09 - will not affect accrued benefits but only future contributions, so the current younger and future generations bear a larger share of the pension risk.

The report noted: "Compared to most OECD countries, third-pillar DC systems play a minor role. A larger reliance on defined-contribution schemes would be useful from a risk-sharing perspective, even though the government should be careful not to pursue such objectives with distorting subsidies."

The OECD warned old-age dependency will increase faster in Finland than almost any other OECD country over the next 20 years, so it should take a "multi-faceted approach" to the ageing challenge. Other recommendations from the report include reducing the pension accrual rate to 1.5% before the age of 65, and increasing it to 6% afterwards, while there should also be consideration of lowering accrual rates in non-working periods such as unemployment, study or parental leave.

"While the average retirement age has increased since the introduction of the new pension system and on the back of a strong labour market, the recession is likely to undo some of these recent gains. Reforms to the pension system are required to increase sustainability and lift old-age employment rates towards the levels of the other Nordic countries," the report stated.

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