The head of Finland’s largest pension fund, the municipal provider Keva, has cast doubt on the reasoning behind the government’s plan to save money by reforming pensions, and stressed that investment rule changes are the best way to bolster the occupational pension system on the private sector side.

Jaakko Kiander, chief executive officer of the €65.7bn pension fund, said: “Reducing pension costs would reduce public spending and also reduce the aggregate deficit of the public sector.

“However, reducing pension expenses would not significantly improve the situation of the state finances and would not reduce the state’s need for borrowing,” he said in a blog on Keva’s website.

“This is because the state pays only a small part of all occupational pension expenses from its own budget,” he said.

All in all, according to Kiander, the tax-funded public sector pays about 40% of pension costs, but about half of this is financed by employer contributions from municipalities and welfare regions.

“The majority of pension expenses are financed by the private sector’s occupational pension contributions and the investment income of pension funds,” he said, adding that changes in spending and contributions in the private sector only had indirect effects on the government’s borrowing needs.

He also argued that there would be secondary effects on government finances of cutting spending on occupational pensions, such as sharply reduced tax revenues because of lower pensioner incomes.

Explaining the background to his blog, published yesterday, Kiander told IPE there was currently going a process of negotiations going on regarding a gradual pension reform for which the government had set a goal of saving up to €1bn annually.

“Given that the Finnish pension system is largely run by pension institutions which are not part of the central government budget, it is not very clear how such a saving would help the main target of the government which I think should be to diminish the central government deficit,” he said.

In the blog, Kiander concluded: “In terms of people’s well-being, a better solution is to try to reform pension institutions’ investment regulation in order to give better investment returns, which can allow a reduction in the contribution level without benefit reductions.”

Kiander was referring to the rules for private-sector pension insurers.

Back in September, Keva’s board decided to increase the risk level of the investment portfolio in pursuit of a higher long-term return on investment assets – which has allowed it to lift its equities allocation – but the pension insurance companies, including Ilmarinen and Varma, which provide private sector pensions, need regulatory change before they are able to make similar decisions.

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