Two pension systems to become one
PRIVATE AND PUBLIC PENSIONS will merge into one pension system. That is the aim of the current government in Finland. In practice, it means that Keva could be split into two. One part would become a new earnings-related pension insurance company.
To begin with, the new company’s customers would consist of municipalities, municipal federations and other municipal organisations. After a transition period, the company would compete for customers alongside the pension insurance companies Elo, Ilmarinen, Varma and Veritas.
The merger would not affect wage earners since the pension benefits would remain unchanged. However, in the long run, the merger would streamline pension contributions. Currently, the municipal pension insurance contribution is four percentage points higher (28.35%) than the private sector contribution (24.40%). Allan Paldanius (Keva) states that the merger is the only way in which the pension contributions of municipal workers can be brought to the same level as those of private sector workers.
The chair of the working group that is preparing the merger, Hannu Iljäs (Ministry of Health and Social Services) states that the reform is about the sustainability and risk management of the earnings-related pension system. Jani Pitkäniemi (Ministry of Finances) argues: “The larger the collective that is responsible for pensions under similar rules, the firmer the system is.”
Pasi Mustonen (Varma) points out that the merger will also streamline the definition of disability and the criteria for disability pensions. Under the current system, municipal workers’ ability to work is assessed in relation to their own profession, while for private sector workers’, it is assessed in relation to any profession or work. “This is in line with the aim to extend working lives,” Mustonen argues.
The working group will present its report on the merger at the end of 2021.
Immigrants improve dependency ratio
THE GREYING POPULATION in Finland causes pressure to increase the pension contribution rate. Most pensions currently in payment are paid for by those who work.
Immigrants to Finland are often of working age or children. Immigration rejuvenates our population and reduces the old-age dependency ratio. The effect depends on the employment rates of the immigrants and their descendants. Second-generation immigrants often have a better employment outcome.
An increase in net immigration would ease the pressure to raise the pension contribution rates, in particular if the immigrants belong to a high employment outcome group. This is evident from a recent study by the Finnish Centre for Pensions. However, reducing emigration from Finland would be the quickest and most efficient way to reduce the pressure to raise the contribution rate. Most emigrants belong to the high employment outcome group, while those who belong to the lower employment groups are less likely to leave Finland.
Most trustworthy pension system
FOR THE SIXTH TIME in a row, Finland topped the integrity and transparency sub-indexes of MMGPI. There are three main reasons for this.
We have a transparent pension system. For example, the online pension record tells each individual how much pension they have accrued; the annual statements of the pension providers are open and accessible to all; the supervision of pension providers is active and risk-based and the pension providers’ boards of directors adhere to the provisions of good administration.
We have a stable society. The principles of a constitutionally governed state are realised in Finland, we have an efficient government, little corruption and terrorism.
Our pensions are secured by a unique principle of joint liability. If a pension provider goes bankrupt, the other pension providers cover the losses and make sure that the insured get their pensions.
Overall, the Finnish pension system ranked fourth in this international comparison.
Limit to centralisation
DECENTRALISATION is a cornerstone of the Finnish pension system. “Its benefits include a spread of risks, improved implementation and secured earnings-related pension assets,” explains Satu Huber, Chair of the Board of Directors of the Finnish Pension Alliance TELA and CEO of Elo Mutual Pension Insurance Company.
One of the advantages of centralisation is strong, solvent actors. Huber warns, though, that “we are soon approaching the limit at which we have to stop centralisation if we want to preserve the benefits of decentralisation.”
In recent years, the number of earnings-related pension providers has gone down to 28.
The merger of the private and municipal pension systems would see the birth of a new, big pension provider.
Huber also hopes the merger will streamline the definition of disability.
Due to the differences in definitions, the number of rejected applications has been smaller in the public sector.