Showing the way
Voluntary individual pension policies within the third pillar of Finland’s pension system are the torchbearers for the defined contribution (DC) type of pension plan. They are provided by insurance companies and may consist of coverage for old age, disability or death, or a combination of these. There is no maximum limit for individual pensions, and they are therefore favoured by senior managers and other key employees.
Take-up is relatively small, with only 7.6% of the population covered by voluntary personal pensions. However, interest has grown recently. A survey by study by the Finnish magazine ET found that 25% of people aged 45 and over is interested in taking up a voluntary private pension.
Premiums for personal pensions insurance have risen from E0.3bn in 1996 to E0.5bn in 2000, but have grown far less rapidly than personal life insurance premiums. according to the Federation of Finnish Insurance Companies. Voluntary personal pensions represented 12.5% of total life business in Finland in 2000.
Personal pension provision is dominated by a handful of life insurers. In 2002 three insurers had three quarters of the life market in terms of assets under management: Nordea with 24.8%, Sampo Life with 23.4% and Suomi with 23.3%
There are two types of voluntary individual pension plan written by insurers – the traditional plan and the unit-linked plan. The traditional plan carries a guaranteed rate of 3.5%, although policies written before 1999 guarantee 4.5%.
One in three plans are now unit-linked. Unit-linked pension policies often combine an element of guaranteed return or at least the option to choose this alternative when nearing retirement. Policyholders can decide which part of the premium they want to be unit-linked and which part guaranteed.
Policyholders can also switch from unit-linked to guaranteed and vice versa. Insurance companies have the discretion to deny this option, although have done so to date. However, there are signs that the insurers may begin to use this discretion.
The best selling products are personal pensions plans with regular or flexible premiums – typically taken out at age 40 to 45 with retirement at 60. Premiums are paid annually or more usually monthly and the typical term of the policy is 20 years. The average annual contribution is E2,000.
Benefits are limited to an annuity if the individual plan is to be tax deductible, but in the other respects personal pension products are similar to other products sold in other EU countries.
The tax treatment of personal pensions is similar to that in the statutory pension provision. Contributions to individual pensions are normally deductible up to E8,500 a year. The return on funds is not taxed during the period of saving, and the pension is treated as taxable income. The total of voluntary and statutory pension benefits may not exceed 60% of earnings and the earliest retirement age is 60.
The Insurance Supervision Authority regulates voluntary private pensions. Supervision of pension funds is done on the basis of annual accounts, an actuarial statement and the statistical information received every year . It can refuse permission to operate as a pension fund.
One other way of providing DC type personal plans to Finnish employees is through pooling and offshore provisions. Varma-Sampo and Sampo Life are associate insurers in the Insurope and IGP networks of insurance companies. Networks make it possible to pool Finnish voluntary group pensions.