Finland: The great public-private transfer
As Finland prepares to transfer responsibility for pension liabilities away from the state towards the private sector, Reeta Paakkinen looks at possible outcomes for provision and contributions
The Finnish occupational pensions sector is considering the effects of reforms to the country’s health and social care system that come into force on 1 January 2019. Under the so-called Sote reform, the private sector will be assuming responsibility for a greater share of social and health services from the public sector.
In practice, the reform could mean the pensions of 220,000 municipal employees transferring from the municipal pensions system (KuEL) to a mandatory defined benefit arrangement covering private sector employees (TyEL). Most of those to be transferred work in the social and healthcare sector and are female. In addition, 5,000 employees from state regional administrative services are set to become employees of the provinces. All those affected will retain their accrued benefits, including pensions.
From the pension perspective, moving provision from the public to the private sector will reduce the numbers covered by the KuEL and boost the numbers covered by TyEL.
The Finnish Ministry of Social Affairs and Health commissioned experts to evaluate the effects of the reform on contribution rates. This group consists of representatives from the Finnish Pensions Alliance (Tela), five pension funds and Finnish Centre for Pensions (ETK). It published its report in October.
The report outlines two scenarios as a result of the transfer of employees to the private system. In the first scenario, a sixth of the estimated 220,000 personnel transfers to TyEL, and in the second, a third transfers.
According to the report, a one-sixth reduction in the number of provincial employees would increase the local government pension KuEL contribution rate by 0.8 percentage points between 2020 and 2080. A reduction of one-third would increase contribution rates over the same period by 1.7 percentage points. When the transfer of employees from state entities to the provinces is taken into account, the corresponding increases in contribution rates are 0.7 and 1.6 percentage points. TyEL contributions would reduce by 0.4% in the case of a sixth of employees transfer and by 0.8% if a third transfers.
“Compared to our previous calculation, the birth rate will drop by 7% each year. That is why there will be fewer pension contributors in the future”
The report concludes that a transfer of employees of this scale would reduce the level of TyEL contributions over the long term, while increasing the funding share of provinces. The report states: “In addition, the contribution levels of the Self-Employed Persons’ Pension Act (YEL) and the Farmers’ Pensions Act (MYEL), as well as of the local government pensions system, would reduce, because these are currently tied to TyEL contributions. The transfers of employees would reduce the pension expenses of the public sector. Provinces would, however, fund indirectly TyEL contributions as they are included in the price of outsourced services. As a whole, the transfer would grow the funding share of provinces and the share of all pension expenses.”
The report also notes that 90% of the contributions to be transferred from the municipal pensions system to TyEL are from women and only 10% from men. This ratio is significant because women’s pension expenses in relation to earnings are greater than men’s because of their longer life expectancy.
In October, the ETK reported that a difficult investment environment and a weak economic outlook was creating pressure for a temporary rise in earnings-related pension contribution. The pressure will persist if Finland’s birth rate remains low. Over the next decade, the real return on investments is expected to be below 3%; after that, the ETK expects a real return of 3.5%.
The contribution income of the pension system will also fall below the expected level in the next few years. This is due to the weak employment outlook and the moderate earnings growth agreed in Finland’s Competitiveness Pact. The current earnings-related pension contribution of 24.4% will only be sufficient up to the early 2020s. After that, there will be pressure to increase it temporarily by 0.5%. The earnings-related pension contribution would then stabilise at its current level from the 2030s to the 2050s.
“Because of the 2017 pension reform, the earnings-related pension expenditure is easy to project. However, it does not remove the risk that the economic outlook places on contribution income and the investment assets. The development in the near future will determine how strong the pressure to raise the contribution rate will be,” says Mikko Kautto, director at ETK.
The Finnish population will grow throughout the review period and the number of people who have turned 65 years will rise year on year. By 2030 there will be nearly 200,000 more retirees than today. Taking into account Statistics Finland’s projected birth rate, the number of working-age people will fall throughout the period, with the exception of the 2030s and the early 2040s.
“Compared to our previous calculation, the birth rate will drop by 7% each year. That is why there will be fewer pension contributors in the future,” Heikki Tikanmäki, development manager at ETK says.