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Impact Investing

IPE special report May 2018

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Finland: Retirement age and contribution level changing

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Ensuring the sustainability of the country’s pension system is the big challenge presently, with a particular focus on raising the retirement age and adjusting pension contributions 

Regulation in summary

• Regulations to change how solvency limits of earnings-related pension providers are set, with fuller account taken of investment risks.
• Pension reform to keep the system sustainable is due to take effect in 2017.
• Lowest retirement age to rise gradually to 65, with the upper limit rising to 70; contribution rates set for standardisation.
• A partial early old-age retirement pension is to be introduced for those in strenuous fields of work from age 61, to replace current part-time pension.

Finnish regulators are working on the new national solvency regime for the country’s statutory earnings-related pension system, which will involve many of the elements from the Solvency II Directive being transposed into domestic insurance legislation.

The other main developments in pensions regulation over the last year within the pensions reform include raising the retirement age and redefining pension contribution levels.

Regulation on how the solvency limits of earnings-related pension providers are calculated – and the decentralisation of investments – are to be reformed, with the relevant acts coming into force in 2017. The new rules will apply to employee pension insurance companies, pension funds, the Seafarers’ Pension Fund and, partially, to the Farmers’ Social Insurance Institution.

Finnish retirement assets (€ ’000s)*

The changes will take more comprehensive account of essential investment risks when determining the solvency of the pension provider. In the future, when pension providers lower their solvency limit, they will have to identify the risks relating to each investment separately. 

Under the new regulations, one investment may be associated with several risks, while the expected return and the relationship between various risk factors will also be taken into account.

The pension reform, which aims to keep the pension system sustainable despite an ageing population, is still in progress. In late 2014, the central labour market organisations – the Central Organisation of Finnish Trade Unions (SAK), the Confederation of Finnish Industries (EK), the Local Government Employees (KT), the Finnish Confederation of Professionals STTK – reached an agreement on a proposal for amendments to the earnings-related pension scheme.

Finland Country facts

The age at which people can start to receive their old-age pension is flexible and that flexibility will be maintained under the reformed system. So far it has been agreed that the lowest retirement age will start to rise until it reaches 65 and the highest retirement age will rise to the age of 70. 

Under the new terms, an employee’s pension will be increased by 0.4% for each month he continues working beyond the lowest retirement age.

The new eligibility for the old-age pension will apply to people born in 1955 or later. 

Starting in 2017, the earliest eligibility age will be raised by three months per birth-year cohort until it reaches 65 years. At the other end of the scale, the upper age limit for starting to draw the old-age pension will be five years higher than the earliest eligibility age.

According to the agreement, as of 2027, the earliest eligibility age will be linked to life expectancy, so that the time people spend working in relation to the time they spend in retirement remains at the 2025 level. 

To maintain this ratio of time spent working to the time spent in retirement, factors affecting the time spent working and the financial and social sustainability of the earnings-related scheme will be reviewed regularly. 

This will be monitored every five years by employees and employers involved in earnings-related pension negotiations, led by the Ministry of Social Affairs and Health (the tripartite system). As part of the reform, the current part-time pension is to be abolished and replaced by a partial early retirement pension, for people whose work is considered to have been physically or mentally tiring.

Finland View

The new partial pension can be drawn at a level of either 25% or 50% of the accrued old-age pension at age 61, at the earliest. If the pension is drawn before the earliest eligibility age for the old-age pension, it will be reduced by 0.4% each month.

Also, the pension will be adjusted in accordance with the life-expectancy coefficient at the time of drawing the pension, with the earliest eligibility age rising to 62 in 2025. Accrual rates of earnings-related pensions will be standardised, with rates for people of all ages set at 1.5% of wages.

After the reform, pension contributions in the system will accrue from the full wage rather than the defined pensionable wage, and in the period between 2016 and 2019, the combined earnings-related pension contribution for wage-earners and employers will be 24.4%

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