Finland: Reforms postponed
Plans to reform the provision of social and health services will have a knock-on effect on occupational pensions
• Pensions of over 200,000 municipal workers could shift to the private sector regime.
• Plans to simplify the creation of new pension funds have been postponed.
• This makes IORP II adoption more complex.
• New investment regulations for occupational pensions came into force in April.
In July Finland postponed a health, social services and regional government reform (Sote) by a year to January 2020. The reform transfers a greater share of social and health services from the public to the private sector.
For the country’s occupational pensions sector, the reform could mean that the pensions of 220,000 municipal employees are transferred from the municipal pensions system (KuEL) to a mandatory defined benefit arrangement covering private sector employees (TyEL). In addition, 5,000 employees from state regional administrative services are set to become employees of the provinces.
The Ministry of Social Affairs and Health last year commissioned a study to evaluate the effects of the reform on contribution rates. From a pensions perspective, shifting provision from the public to the private sector will reduce the numbers covered by the KuEL and boost the numbers covered by TyEL.
The study outlined two scenarios as a result of the transfer of employees to the private system. In the first, a sixth of the estimated 220,000 personnel transfers to TyEL, and in the second, a third transfers.
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 one-third reduction would increase contribution rates over the same period by 1.7 percentage points. TyEL contributions would reduce by 0.4% in the one-sixth scenario and by 0.8% in the one-third scenario.
The study concluded 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 the provincial governments. As a whole, the transfer would grow the funding share of provinces and the share of pension expenses overall.
Plans to simplify the rules governing the set-up of new pension funds have experienced a setback. In March, the Council of Regulatory Impact Analysis (CRIA) 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, released in February, aimed to simplify the process. Proposals included 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.
CRIA, however, said the draft did not explain whether relaxing the regulations on establishing and operating pension funds is the right way to diversify the country’s pensions system. The council also considered the impact assessment of the draft proposal to be inadequate. This means a 12-month delay in the reform of the current legislation on pension funds and foundations.
Some in the sector had envisioned that the law on pension funds and foundations could have been reformed before the summer, and before the sector adopts the IORP Directive later this year. Now Finland will have to adopt IORP into its existing pension fund legislation and then reform the whole legislation again when the new law is finally passed.
New investment rules for occupational pensions came into force in April. Since then, equity, bond and other investments in OECD countries outside the European Economic Area (the EU countries plus Iceland, Liechtenstein and Norway) will be equivalent to investments in EEA countries.
Limitations to real estate investment have also been removed. From April, it became possible to invest more than 40% of assets in real estate, and the limitation on investing more than 15% of assets in one single property was removed.
In January, a new regulatory framework for calculating the solvency of Finnish pension funds (TyEL) came into effect. Previously, only assets covering liabilities were taken into account in calculating the solvency of a pension fund. Now, all holdings of a pension fund are taken into account in the calculation. According to the local finance regulator, the change will not have any noteworthy effect on local pension funds.
Over the first quarter of 2017, Finnish pension funds had a healthy solvency ratio. The ratio of work pension (TyEL) assets to liabilities increased to 129.7%. At the end of 2016, the ratio stood at 128.6%.
There are currently 24 pension funds in Finland managing statutory pensions, of which six are insurance schemes and 18 are company pension funds or industry-wide pension funds. Assets under management in the TyEL system stand at about €120bn. A large share of assets are held by insurance schemes.