Finland regulation: Seeking pension diversity
Finland is making it easier to set up a pension fund, with the aim of increasing competition
- FInland’s government is seeking to make it easier to set up a pension fund.
- The body responsible for analysis of regulatory impact has rejected one proposal.
- Asset transfer limits need to be changed.
Finland’s Council of Regulatory Impact Analysis (CRIA) has sent a new draft law on pension funds and foundations back to Finland’s Ministry of Health and Social Affairs (STM) for further consideration.
The government’s draft proposal aims to make establishing pension funds easier by simplifying the rules. Proposals include lowering the minimum requirement for active scheme members from 300 to 150, removing obstacles for generating a unit combined with different pension insurance schemes, and adjusting the transferable solvency margin. There are currently only 18 pension funds in Finland managing statutory pensions, with €6.5bn of assets under management.
CRIA stated that whilst the draft did succeed in its central goal of clarifying current legislation on pension funds, it did not explain whether relaxing the regulations on establishing and operating pension funds is the right way to diversify the country’s pensions system.
CRIA, established by the Prime Minister’s Office in 2015, is responsible for issuing statements on government proposals and their regulatory impact. It aims to improve the quality of legislative drafting and, in particular, the impact assessment of government proposals.
CRIA chairperson Leila Kostiainen wrote: “The council sees that the impact assessment of the draft proposal is very superficial and inadequate. The central impacts of the draft proposal have not been recognised. The position of the insured has been covered in a superficial manner, albeit the proposal can have an indirect impact on all insured. The impact on the position of mutual pension insurance companies, pension funds as well as employers has been covered in a very insufficient manner.”
She added: “The Council sees that the relevant impact assessment has to be added into the draft proposal before it is forwarded for parliamentary discussion.”
Hannu Ijäs, director of the insurance market unit at the health and social affairs ministry, says the rejection of the draft proposal means a one year delay in the reform of the current legislation on pension funds and foundations.
Ijäs explains: “We were envisioning that the law on pension funds and foundations could have been reformed before the summer and before we adopt the IORP Directive in Finland later this year. But now we will have to adopt IORP into our old pension fund legislation and then, when the new law on funds is finally passed, reform the whole legislation again.”
Ijäs agrees that the existence of a more thorough impact assessment will help parliament decide on the issue, but notes that some of it went into questioning the very fundamental issues of modern pensions systems.
“There was, for example a question, on the very benefits of the existence of a diversified pensions market for the Finnish economy. This is a huge question which would take a lot of time and resources to investigate,” Ijäs comments.
For instance, the question of how many additional pension funds and foundations would be established if the law passed is impossible to answer as it depends on the market. “We are going to assess the impact of the law in more detail, but will do it within the resources we have and focus on the more concrete effects of the reform,” Ijäs continues.
The ministry will ask consultants with international expertise on pension fund legislation to comment on its impact assessment.
One reason why the council required such a detailed impact assessment of the law is that it is a relatively new body, which has been operating for just over a year. A draft law may now reach Parliament no earlier than late 2018.
Ismo Heinström, legal expert at the Finnish Pension Funds Association (ESY), says the rejection of the draft law and the requirement for a more thorough impact assessment means extra work, but will eventually result in a thoroughly considered new law.
“The council said it needed more thorough research on the obstacles of establishing new pension funds and they wanted to evaluate if creating new funds would serve the diversity of the Finnish pensions industry,” Heinström says.
“However, the problem at its core is simple: the limit for assets that currently can be transferred from a pension insurance company to a pension fund to be established, is not adequate. If a company has ever changed its pension insurance company, a certain number of insurance policies and assets relating to those policies are excluded.
“The same applies to different company arrangements, even if those pension policies are considered to constitute a valid base for deductions in the same pension insurance company. This is clearly against the principle of symmetry.
“And when it comes to the role of new funds in the diversification of the local pensions industry, the emergence of new funds would very obviously increase competition in the market and diversify Finnish capital markets,” Heinström adds.
Timo Toropainen, managing director of ESY, commented on the decision in an official statement. He underlined, that it is worth remembering that corporate pension funds have made higher than average returns in comparison to mutual pension insurance companies in Finland. They are also more solvent, to the tune of 10 percentage points.
“The council also noted that small pension funds and foundations can be risky for the insured, but more than 70 pension funds and eight mutual pension insurance companies managing compulsory work pensions for employees have been in existence for decades. Of these one mutual pension insurance company filed for bankruptcy and two pension funds ended up in a slightly less serious state of insolvency,” Toropainen underlined.
Finland’s demographic outlook worsens
Finland’s demographic outlook means that the future funding of pensions will become more complex, local pensions experts say.
Janne Pelkonen, senior advisor at the Finnish Pensions Alliance (TELA), notes that Europe faces major challenges related to its age structure as the proportion of those beyond 65 years will increase from 17% to 30% by 2060.
“However, here in Finland the issue is even more pressing as significant generations will age even earlier, starting in 2030. The proportion of those over 65 years old will reach 26% by 2060,” Pelkonen says.
The birth rate has been in constant decline over the past six years. In 2016, Finns had on the average 1.57 children per woman, whereas in 2015, the rate was 1.65. A birth rate of 2.1 children per woman is necessary to retain the current population level.
“In actual terms this is a radical decline, the reasons of which have not been really researched yet,” Pelkonen adds.
The issue is not, of course, just about the fertility rate, since demographic development depends also on net immigration.
Suvi-Anne Siimes, managing director of TELA, has commented on Finland’s pension planning and demographic prospects, saying that if fewer children are born, demographics will become skewed and funding pensions harder.
“This is visible also in the long term calculations on occupational pensions. A reduction in birth rate will weaken the funding of work pensions especially in 2050s,” she wrote in the Finnish newspaper Helsingin Sanomat in April, the day new statistics on the declining population were published. Siimes also underlined the need to discuss why having children is less attractive these days.
According to the Finnish Centre for Pensions (ETK), the average expected retirement for statutory old age pensions was 61.1 years last year. Nearly 40% of those who retired were 63 years old, meaning they started their pensions as early as the law allows. Finland has just implemented a pension reform that increases the statutory flexible retirement age from 63-68 to 65-70, with a transition period, linked to life-expectancy.