The Finnish government has approved a reform of the earnings-related pension system hammered out by the country’s labour-market organisations, which includes changes in investment rules to allow more risk-taking aimed at boosting potential returns to make the system more sustainable.

The reform has been in the pipeline since the government tasked a tripartite working group in 2023 with determining what had to change to ensure an adequate level of benefits and bolster public finances in the long run by around 0.4 percentage points relative to GDP, or about €1bn.

The plan now is for the Ministry of Social Affairs and Health to implement the pension reform based on the agreement reached, with draft legislation going before Parliament in 2026 in order for changes to enter force at the earliest at the start of 2027.

The main elements of the reform are a set of investment regulation reforms for private sector earnings-related pension providers aimed at increasing returns; an agreement to keep the contribution rate at 24.4% for private sector earnings-related pensions (TyEL) from 2026 to 2030, and an inflation stabiliser that curbs index adjustments to pensions if the index outpaces the wage coefficient over a two-year period.

The agreement does not change current pension benefits, such as the retirement age and pension accrual rates.

The investment reform involves an increase in the equity-linked buffer fund to 30% which, in turn, allows for an increase of the equity weight of investments to a maximum of 85%, and a reduction of the solvency limit to 95%, which reduces forced sales of investments at unfavourable times, according to the Finnish Centre for Pensions (ETK).

The raft of changes to investment rules also expands access to leverage in real estate investments, and limits the ability of employers to borrow from their premiums.

ETK said that following the reform, the proportion of shares in providers’ investment portfolios could increase by more than 10 percentage points, while the weight of other investments would decrease.

“Following these changes, the expected real return for private sector pension assets could improve by around 0.3 percentage points compared to current regulations,” it said.

Mikko Mursula at Ilmarinen

Mikko Mursula at Ilmarinen

Mikko Mursula, chief investment officer at Ilmarinen – along with one of the two largest pension insurers, that are the mainstays of the private-sector side of the earnings-related pension system – has long advocated for increasing the risk levels of pension insurers’ portfolios to lift long-term expected returns.

“If regulations allowed it, Ilmarinen’s equity allocation could, in the long run, be around 60%,” he told IPE.

“At the same time, short-term return fluctuations are likely to increase, but this is worth accepting since pension assets are invested for decades,” he said.

At the end of June 2024, Ilmarinen had 48% of its total assets invested in equities - 32% of assets in listed shares and the remainder in unlisted shares.

A spokeswoman for Varma, the other largest pension insurer, said that right now, the firm was waiting for the Finland’s trade unions to accept the agreement within their own administrations.

The opportunities provided by the reform would encourage an increase in the share of equities in the investment portfolio, she said, adding that increasing stock weighting allowed for better returns, though it might lead to greater fluctuations than usual.

“The risks of investing decrease as the time horizon lengthens,” she said to IPE, adding that pension investing was a long-term endeavour. “Pension assets will continue to be invested profitably and securely,” she added.

Carl Pettersson, chief executive office of Elo – Finland’s third biggest pension insurance company – said: “I can honestly say that this is a good and necessary reform.”

In practice, he said in the blog, each pension company would be given the opportunity to implement a moderate increase in the risk level.

Over 20 to 30 years, pension assets could be expected to be able to produce a better return than without the increase in equity weighting, he said.

“This reform improves the long-term sustainability of the pension system’s finances and is therefore an important reform, especially from the perspective of younger generations,” Pettersson said.

But he also said that not all needs or risks could be taken into account in one solution.

“It is certain that pension reforms will also be needed in the future, but the outcome of the negotiations shows that as a citizen, you can be very confident in the ability of the system’s owners to make the necessary decisions – also in the future,” the Elo CEO said.

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