Reeta Paakkinen outlines reforms to Finland’s pension system, that will increase the retirement age and the accrual rate for earnings-related pensions

Finnish labour market organisations, government representatives and pension funds signed an agreement this September that will increase the retirement age from 63 to 65 by 2027. Negotiations for the reform have been ongoing since the beginning of 2014. The Ministry of Health and Social Affairs is now preparing a bill that the Finnish parliament will debate after the 2015 elections. The law is expected to come into effect in 2017.

The reform will affect employees born in or after 1955, by increasing the retirement age by three months per year from January 2017. The way earnings-related pensions accrue will also change. At present, earnings-related pensions accrue in two phases – by 1.5% of salary between ages 18 and 52, and by 1.9% between 53 and 62. After the reform, pensions will start accumulating from age 17 but the accrual rate will remain at 1.5% throughout. Under a transition provision applicable between 2017 and 2025, pensions will accrue at a rate of 1.7% of pay for employees aged between 53 and 62.

The so-called super-accrual regime will be abolished. Currently, the pension accrual rate for employees working after reaching the minimum retirement age of 63 and until the age of 68 is 4.5% of salary. This will be replaced by a system called deferment increase, in which a person accrues a higher pension between the ages of 65 and 70, but one that is calculated on the basis of all years in employment. 

Furthermore, whereas the pension accrual rate is currently calculated after deducting earnings-related pension contributions of 5.55-7.05% from the individual’s salary, the pension accrual rate will be calculated from the full salary without deductions from 2017, thereby increasing the total pension. Earnings-related pension contributions, payable by employers and employees, will increase to 24.4% by 2017.

A new regime entitled ‘years of service pension’ will be introduced, for which those in physically or mentally demanding jobs can apply after at least 38 years of employment. The current part-time pension will be abolished and replaced by a partial early retirement scheme. The eligibility age for the partial early old-age pension will rise to 62 years by 2025. The current life expectancy coefficient will be calculated more leniently as of 2027, by which time the retirement age for all age cohorts will be 65 years. The life expectancy coefficient will also be used when calculating a retirement age for each cohort. 

Akava, the Confederation of Unions for Professional and Managerial Staff, does not support the reform. Akava’s chairman Sture Fjäder tells IPE, that it turned down the reform proposal because it removes a central incentive from the system, discriminates against women and is not extensive enough, meaning it will have to be overhauled in 10 years anyway. Akava’s decision, however, will not obstruct the reform.

“We wanted a solution in which final years in employment would count more than those in early working life, and a pension accrual rate exceeding 1.5% in the last years’ of work,” Fjäder says. “This would be the only way to really encourage more years in working life. Our members graduate later than others, and highly-educated women in particular need to patch up their pension accruals as they often end up having a career with temporary postings and maternity leave. For academic women this reform is a catastrophe.” 

SAK, the confederation of 20 trade unions in industry, the public sector, transport and private services, praised the reform and said it believes the retirement system will become more equitable when future pension eligibility accrues more steadily throughout working careers. “Protecting the future pensions of the current younger generation was a key objective in the negotiations for SAK. We were equally focused on ensuring a respectable retirement path for older employees,” SAK’s President Lauri Lyly notes. 

EK, the Confederation of Finnish Industries, notes that the reform supports the three central goals in the Finnish pension landscape – extending working life, keeping pension contribution rates of salaried employees and employers in check and reducing the sustainability gap of public finances. 

“For youth in particular it is important that they will not be made to carry a unreasonably heavy burden. People’s purchasing power and the recruitment opportunities of employers will no longer be weakened by increasing pension contributions,” EK’s director general Jyri Häkämies says. 

“It is now of utmost importance that political decision makers commit to take the reform further in such a manner that all necessary legal proposals can be given to the new parliament right in the beginning of its term next year. This is how the reform can come into effect in the beginning of 2017,” Häkämies adds.

Carl Haglund, leader of the Swedish People’s Party, on the other hand, has criticised the reform and called the government to consider carefully how to proceed. “The reform discriminates against highly educated women and the changes provide no incentives for employees to stay in working life longer,” he said at a recent party convention.