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Evaluation of long-term projections

A report that compares the long-term projections of the Finnish Centre for Pensions with the actual outcomes shows that the projections perform as intended. The projections for earnings-related pension expenditure have reflected the real outcome the most. The long recession following the financial crisis has been underestimated in the projections.

The Finnish Centre for Pensions publishes its long-term projections of the development of pensions at regular intervals.

The projections aim at showing how the pension expenditure, benefit levels and financing develop if the demographic and economic assumptions are realised and the laws remain unchanged. The report shows that the projections published in the 2000s are well in line with the actual outcomes.

The accuracy of the long-term projections of the Finnish Centre for Pensions was tested by repeating the calculations and replacing earlier background assumptions with current data.

“The model performs as intended: if the assumptions are realised, the calculations render results that concur for the most part with the actual outcome,” Meeri Kesälä, mathematician at the Finnish Centre for Pensions, explains.

For the first time, the accuracy of the projections are also tested short term. The comparison focuses on the projections made between 2004 and 2013 and on how these projections compare with the actual outcomes in 2005-2016.

Financial crisis during the projection period

The comparison between the projections and the realised outcome was done in terms of earnings-related pension expenditure, payroll and pension assets, particularly the pension funds under the Employees Pensions Act.

The absolute value (euro) projections of pension expenditure are closely aligned with the historical outcome. Only the euro projections for expenditure on disability pensions overestimate the actual spending.

Due to the financial crisis that began in 2008 and the following long recession, the payroll development has been overestimated in the projections. In the projection published immediately after the outbreak of the financial crisis (2009), the cyclical downturn was projected to be deeper but shorter than it actually was.

The financial crisis is strongly reflected also in the calculations of the earnings-related pension assets.

“Investment returns tend to fluctuate according to economic situation. In the long-term projections, pensions assets are assumed to yield an even long-term average return,” says Kesälä.

The Finnish Centre for Pensions’ long-term projections: how they compare with actual outcomes, Reports 05/2017

More information

Meeri Kesälä, Mathematician, phone +358 29 411 2310, meeri.kesala(at)etk.fi