Finland’s government is looking to improve the regulatory framework for corporate pension funds, according to Reeta Paakkinen

A working group has started evaluating the reform needs of Finland’s regulatory framework for corporate pension funds with an aim of drafting a set of reform proposals by the end of June 2015. The working group was set by the Ministry of Social Affairs and Health (STM) this spring, and meetings of the 16 representatives from local pensions industry, labour market organisations and the ministry resumed work in August.

The chairman of the working group is Hannu Ijäs, director of the insurance unit at the STM. “Our task is to draft a proposal for the government for a comprehensive reform of the current laws regulating corporate pension funds. In particular, we are investigating if the current regulations complicate or impede establishing and operating corporate pension funds with a view to removing them,” Ijäs says.

The working group should produce a report listing its reform proposals by June 2015. However, with general elections scheduled for April 2015, the reform will be left for the next government to pass.

The working group aims to revamp the existing regulations to place corporate pension funds on an equal standing with mutual pension insurance companies. The working group will also evaluate if the current regulations on operating voluntary pension funds are up to date. Overall, its aim is to ensure the regulatory framework will enable corporate pension funds to exist and operate effectively, so that there remains a diversity of alternatives available for the arranging of statutory pensions cover.

“We are discussing, for instance, how many employees should a company have to be allowed to establish a pension fund. Current regulations are quite strict on this – nowadays the minimum is 300 employees and if it drops, the fund has to be dissolved. Our focus is also on who carries responsibility in pension funds if the fund becomes insolvent or makes losses. How far can shareholders be responsible for these losses? These are the very fundamental questions we are discussing,” Ijäs says.

Discussions on updating the current regulatory framework have been ongoing for several years. The current two laws regulating the industry were drafted in 1992 and 1995, just before Finland joined the European Union, when the corporate code was last rewritten. “In a way the existing regulatory framework was out of date already when it came into force,” Ijäs explains.

One development, which indicates regulations may have made existence and operation more challenging for smaller company funds, was the notable drop in the overall number of corporate funds. Over the past decade, their number has halved to the current 18, with tens of funds – including those of Finnair, Nokia and the State Railways – dismantling their schemes and transferring assets to mutual pension insurance companies.

Before the working group started its project, the ministry asked 29 different bodies, including labour market organisations, pension funds and relevant parties, about their views on the current regulations. Several industry bodies like the Finnish Pension Funds Association (ESY) told the ministry the number of company pension funds had declined because of a general centralisation trend in the market as well as financial considerations involved in maintaining corporate schemes. Regulations on solvency levels, minimum requirements of the number of employees in corporate funds, as well as limitations on combining different insurances in one single fund were quoted as reasons for the decline in the number of corporate schemes. Lack of understanding among companies regarding the establishment of a pension fund was also mentioned as a contributing factor. Respondents also noted some employers closed their schemes and transferred assets to larger insurance companies in order to be able to focus better on their core business and reduce financial risk.

Many respondents also found the current regulations confusing and unclear, such as understanding which parts of the legislation can be applied to corporate funds and which to voluntary pension schemes.

The Finnish Pension Funds Association finds the current regulations to be favouring mutual pension insurance companies at the expense of smaller corporate schemes. Ismo Heinström, legal adviser at ESY says: “There are no adequate financial prerequisites for establishing a corporate pension fund and no decent, fair framework for transferring assets from an insurance company to a fund to be established. A company should have the possibility to transfer and combine all the insurances of its employees to a single scheme even from different insurance companies when it wishes to do so. At the moment regulations make this impossible,” he says.

ESY would also like to see a change in the way the amount of transferable solvency capital from an insurance company to a fund-to-be-established is calculated, towards a model, which would better reflect the financial realities of the corporate fund, and be fairer than the current regulatory framework.

“Two basic issues lie in restrictions to transfer assets and liabilities from insurance undertaking to a new pension fund. Without a fair share of liabilities and assets, a pension fund is not going to be a genuine option for an employer and legislation process is but in vain. That kind of outcome hardly serves anybody’s interests,” Heinström adds.

Ijäs agrees the market in Finland should be as diverse as possible. “There should also be pension funds operating, various alternatives for arranging pension cover. This has a positive influence on the whole industry as it makes the sector more vibrant,” he says.  

The Finnish Competition and Consumer Authority also touched on the weaknesses of the current regulatory framework when responding to STM’s inquiry by commenting: “The relative easiness of establishing a corporate pension fund or a foundation is one of the cornerstones of a properly functioning market.”

Heinström of ESY, which has been calling for a revamp of the regulatory framework for nearly a decade, notes that legislative reform is not only important for the corporate pension funds sector but also for the very existence of the decentralised model, capital market, efficiency and liberty of choice for the employers.

“Regulations need to be carefully and openly evaluated, and if necessary, adjusted in a way that allows employers to choose between different pension providers. Without improving freedom of choice, legislation is hardly going to serve its fundamental purpose,” he concludes.