Finland: Two to become one
The government is planning to unify the municipal and private-sector pension systems
- The new Finnish government intends to unify the municipal pension and the private-sector systems
- There will be open competition between the two sets of pension institutions following the transition period
- The government plans to increase the employment rate of those aged 15-64
- A new tax on investment funds is planned
One of the main aims of the new Finnish government, appointed in June, is to unify the two separate pensions systems of the country. Unification of the municipal pension system and the private-sector system will be based on a report published in February.
The task of the joint-working group of the Ministry of Social Affairs and Health and the Ministry of Finance was to consider whether the two separate pension systems could be unified. The working group analysed the differences between the two systems and the difficulties that might rise if they were combined. Based on the analysis, the working group has concluded that unification was feasible.
Timo Kietäväinen, CEO at Keva, Finland’s largest pension provider, welcomed the unification plan. Including unification in the government programme increases the stability of the pension system, Kietäväinen commented. The unification plan is a “good kick off for the massive reform of municipal pensions”.
Keva administers the pensions of public-sector employees, consisting of pensions for those working for local government, the state, the Lutheran church and the national benefits agency Kela.
“Recording this issue in the government programme also supports the work of the group of experts who, in their report published in February, drafted a framework and schedule for the reform,” Kietäväinen wrote.
Kietäväinen considers the unification of the two systems a positive step, enabling private-sector employees and municipality employees to be insured in the same pensions system. “This means that after a transition period private companies and organisations could also, if they wanted, arrange their work pensions through Keva.
“On the other hand, employers in the municipal sector could, after a transition period, organise their legislative pension security either in a mutual pension insurance company, in a pension fund or foundation,” Kietäväinen said.
A new tax on investment funds?
The government is considering introducing a new tax on the dividend payouts of investment funds. The government says it will investigate the prospects of collecting “a reasonable tax on profits derived from the real estate investments of foreign funds and other tax-exempt corporations” by 2022.
Finance Finland, the Finnish financial lobbying organisation, has been outspoken in its criticism of the plan. According to Lea Mäntyniemi, director of regulatory affairs at Finance Finland, the proposed tax on profits would also target the dividends of mutual pension insurance companies. “The costs of this to the pensions system are evaluated at approximately €40m annually,” she says.
“The new tax on profits for institutional investors and investment funds is harmful,” Mäntyniemi adds, as the tax would increase pressure to increase work pension premiums and raise the competitive advantage of foreign investment funds, according to the organisation.
“Finnish funds are an export title. Their attractiveness would inevitably suffer if the tax regime is tightened,” Mäntyniemi continues.
Introducing a new tax on profits for foreign funds’ real estate investments might actually reduce Finland’s tax income, according to Finance Finland. If funds move overseas because of the new tax regime, Finland would also lose management fees paid from overseas to funds registered domestically.
Mäntyniemi says: “There is also the risk that funds moving overseas may become less interested in the Finnish market. There is also a need to maintain the future competitiveness and stable operational framework for Finnish funds.”
She also points out that decisions regarding the taxation of different investment products were passed in parliament as recently as in March.
“A new tax regime would increase the pressure also to increase occupational pension premiums whilst the population ages. The pensions system that has been evaluated as one of the best in the world is based on reserves and the compound interest principle. Even a small cost multiplies, which in the long term leads to the level of pension assets remaining lower than aimed. Finnish companies and employees will pick up the bill,” she adds.
After the two pension systems merge the municipal employees will be covered by the Employees Pensions Act and pension insurance will also, as a rule, be governed by this framework.
After the transitional period there will be open competition between the two sets of pension institutions. Employers in the municipal and the private sector would have an equal opportunity to organise employees’ pension insurance through employment pension insurance companies, industry-wide pension funds or company pension funds.
The unification of the two systems will have no impact on the pensions of those who have already retired. It will also not affect the pension premiums of those who are still in working life, their pension accrual or retirement age.
There are still several questions pending and details to be clarified before the two systems can be merged, Kietäväinen noted. These include the bureaucracy and practical issues like combining records that rise from unifying the two systems.
“There needs to be adequate time to prepare for the unification. The launch year of 2027 that the working group has put forward is an absolute minimum,” said Kietäväinen.
The working group, which published its findings in February, did not touch upon how exactly the pensions of state employees, the Lutheran church and the benefits agency Kela’s labour pensions would be arranged in the future. So there is an urgent need to expand assessment to these details as well, Kietäväinen said.
“There needs to be adequate time to prepare for the unification. The launch year of 2027 that the working group has put forward is an absolute minimum”
The government has also set out plans to increase the employment rate to 75% in the 15-64 age group by 2023. In May, the employment rate in Finland for the same age group stood at 73.1%, whereas a year ago it was 72.3%, according to Statistics Finland.
“In the longer term, the sustainability of general government finances requires an even higher employment rate than this, which is why attention will be paid to measures whose employment impact will be visible only after some delay,” the government programme states.
“The objective of employment rate reaching 75% is very important and in case it happens, it will strengthen the sustainability of the labour pensions system as well,” said Kietäväinen.
Jaakko Kiander, senior vice-president at Ilmarinen, says that the government also aims to map out alternatives to improve the pensions security of entrepreneurs. Kiander says: “This work is the continuation of the working group which was assessing how to reform pensions of entrepreneurs. The working group, however, did not reach consensus on the issue and that is why assessing the issue continues,” Kiander says.