The Finnish Pension Scheme in Brief

The Finnish Pension Scheme in Brief

Finnish pension provision consists mainly of the employment-based earningsrelated pension and the residence-based national pension, which provides a minimum income. Employer-specific pension provision or pension provision based on labour market agreements as well as pension provision based on personal insurance policies are not very common in Finland compared to many other European countries. The reason for this is, among other things, that the statutory earnings-related pension scheme has no upper limit in euros for the pensionable earnings or for the pension. From the beginning of 2005 the largest pension reform since the initial years of the scheme took effect. The most important changes of the extensive pension reform was the taking into account of the earnings of the whole work history in the pensionable earnings, introduction of the flexible retirement age for the oldage pension between ages 63 and 68, raising of the age limits for pre-retirement pensions, total abolishment of the unemployment and individual early retirement pensions as well as taking into account of increased longevity in the pension amount. In addition the calculation rules of the different pension acts were harmonised further. The reform was continued through an overall reform, which took effect from the beginning of 2007 and which unifies three private-sector pension acts for employees into one Employees Pensions Act (TyEL). This reform will not affect the contents of pension provision almost at all. In Finland, almost all gainful employment is covered by pension provision. Self-employed persons, farmers, seamen and public-sector employees have their own pension acts. The acts offer pension provision which more or less corresponds to that of the Employees Pensions Act (TyEL). The extensions introduced from the beginning of 2005 as regards the taking into account of unpaid periods improve pension provision especially for women. The benefits of the earnings-related and the national pension schemes are largely the same. The national pension guarantees a minimum pension, if the person receives no earnings-related pension or if the earnings-related pension is small. The schemes secure subsistence in old age, in the event of incapacity for work, death of the family breadwinner or the ageing person becoming unemployed.

The Finnish Pension System

The earnings-related pension acts make it possible to work part-time and receive a part-time pension instead of the reduction in income. The administration of the earnings-related pension scheme is decentralised. In the private sector earnings-related pension provision is handled by pension insurance companies, company pension funds and industry-wide pension funds as well as the seamens and the farmers specialised pension providers, and their activities are coordinated by the Finnish Centre for Pensions and supervised by the Ministry of Social Affairs and Health and by the Insurance Supervisory Authority. In addition the public sector has its own authorised pension providers. The national pension scheme is administered by the Social Insurance Institution (Kansanelkelaitos Kela) under the auspices of Parliament. The earnings-related pensions are financed jointly by the employers and the employees. In addition the State participates in the financing of the self-employed persons and seamens pensions. The national pensions are financed solely through employer contributions as well as tax revenues. The private-sector earnings-related pension scheme has already from its beginning in the 1960s used partial funding. This means that about one-quarter of the pension contributions are funded to cover future pensions. The remaining three-quarters are used to finance pensions in current payment. The State, the employees and the employers as well as the entrepreneurs all influence the development of the legislation on the earnings-related pensions. Earnings-related pension provision is based on law, but the principles are mainly agreed on in negotiations between the labour market organisations. In the beginning the establishment of the earnings-related pension scheme was carried out with the participation of the labour market organisations, and earnings-related pension provision is still a special focus of interest for the labour market organisations. Population ageing poses challenges also for the Finnish pension system. The large age groups of post-war baby-boomers are nearing retirement age and in the next few decades the age groups that enter the labour market are smaller than the age groups that exit the labour market. The share of total pension expenditure in GDP will increase from approximately 11 per cent in 2005 to a good 14 per cent in the 2030s. Efforts have been made to stave the growth in pension expenditure especially through the 2005 pension reform. The life expectancy coefficient, which will

The Finnish Pension Scheme in Brief

affect pensions from 2010, will adjust pension expenditure according to the changes in life expectancy. In the long term the life expectancy coefficient will significantly diminish the effects of population ageing on pension expenditure. The relation of new old-age pensions to the average wage is currently approximately 50 per cent. This proportion will remain at more or less the same level until it towards the end of the next decade decreases slightly mainly due to the life expectancy coefficient.