Finland: Temporary solution
Reeta Cevik assesses proposals to evaluate temporary investment regulations and to raise the retirement age
The Finnish pensions sector is preparing itself for a host of macro-level regulatory changes, the details and extent of which will become clear over the coming six months. The upcoming changes will affect investment regulations, solvency levels, competition between pension institutions and retirement age.
Two working groups have, since summer 2009, been evaluating the future of the temporary investment regulations and solvency requirements that came into force in December 2008 to help funds to deal with the global financial crisis.
The groups were set up by the social and health affairs ministry and consist of representatives of the ministry, the Bank of Finland, labour market organisations, pension insurance companies, the Finnish Pensions Alliance (TELA) and the Finnish Centre for Pensions (ETK). In November 2008, the social affairs and health ministry proposed the temporary relaxation of the existing solvency requirements and investment regulations to enable funds to maintain a healthy solvency during the crisis.
The temporary legislation, which will be in force until the end of 2010, increased the amount of operating capital - that is, capital above the fund's liabilities. This enabled pension funds to make equity investments, as well as use other more risky asset classes to require more solvency capital than bonds or less risky assets would have given them. The aim of the temporary arrangement was to protect the funds so that they would not have to sell their equity investments. It also brought forward to 2008 from 2012 the date of increasing equity-indexed technical reserves to 10%, transferring only 3%, the fund interest rate, to pension funds, and using the so-called EMU buffer funds to support solvency levels.
The arrangement was scheduled to last for two years and the working groups are now considering whether the temporary arrangement should be continued or, if reversed, how and when. The groups must propose a solution by March 2010.
Matti Leppälä, director at TELA, notes many of TELA's members are of the opinion that the temporary arrangement should be continued until a new set of permanent regulations has been drafted. "The working groups are trying to determine whether the temporary investment regulations should continue, and for how long, or if there should be a return to the pre-crisis regulations. They are also studying the effects of the financial crisis on pension investments and future returns. Many members would rather see the temporary arrangement continued and a comprehensive, carefully-drafted set of regulations later in the future," he says. "The planning of a possible new set of regulations requires more time. Funds need to plan their asset allocation for 2011 well in advance and for this they need to know what legislation is applied. They will be in a rush to comply in case the temporary arrangement is brought down."
The last time Finland introduced new investment regulations for pension investors was in January 2007. Based on recommendations by a committee of employer and trade union representatives chaired by former Ilmarinen CEO Kari Puro, they included an increase in equity investments to 35% on average of a portfolio, from 25%, with the level to rise by two percentage points a year over five years, and a relaxation of the rules on alternative investments.
At the same time, another working group formed in March is trying to find ways to increase effective retirement age by three years, with the aim of completing its task by the end of 2009. At present the average effective retirement age in Finland is 59.4 years. Finland's finance minister Jyrki Katainen said earlier this year the gradual increasing of retirement age Finland introduced in 2005 had not been enough to extend years in active employment. "If the effective retirement age is at 59, our welfare society costs more than we contribute. One more year at work would add some €3bn to the state finance," he told IPE.
The group was set up by government and labour market organisations as a response to the uproar expressed in February to government's unilateral announcement of an increase in the retirement age from 63 to 65 from 2011. According to the announcement made by prime minister Matti Vanhanen, there was no need to negotiate the issue with the labour market organisations as they would have rejected it out of hand.
However, social pressure prompted the government soon to adopt a more careful approach and set up a working group to plan the change. The group consists of representatives of labour market organisations and ministries of finance, health and social affairs, and is led by Jukka Rantala, managing director of ETK. The group's work is likely to be affected by the upcoming pension sustainability calculations of ETK, based on the lifespan estimates of Statistics Finland, to be published in November. In the present calculations pension funds are expected to yield a real return of 4% annually.
"The financial crisis has challenged this target. Those making the new calculations on the financial sustainability of the system must now decide if they will calculate return expectations lower and how this would affect the need to increase contribution rates. The Finnish pension system is still mostly pay-as-you-go and only partially funded," Leppälä says.
The proposals on how to encourage competition between pension insurance companies, industry-wide and company pension funds are also almost complete and were sent out to a consultation round in late August.