Division of Costs
The governance of the earnings-related pension system is decentralised with several pension operations in both the private and public sector. The pension is granted and paid by the earnings-related pension provider in which the worker was last insured before retiring. That means that, if the worker has worked for several employers during their working life, the pension of the worker may be insured with several different pension providers. Each pension provider is liable for its pension component for as long as the pension is paid.
The pension provider that pays the pension to the pension recipient collects any components that other pension providers are liable for based on a division of costs specification made by the Finnish Centre for Pensions and the principle of the last insurer (VILMA).
The division of costs principle has been applied in the private sector since the Employees’ Pensions Act (TEL) came into force in 1962. Since the beginning of 2004, the main part of the public sector pension providers moved to the VILMA principle and the cost of division system.
Each year, the Finnish Centre for Pensions specifies the different pension providers’ shares of paid earnings-related pensions and certain benefits for unpaid pensions and transfers the State’s shares under the Self-employed Persons’ Pensions Act and benefits for periods of childcare and studies and the Employment Fund’s share of the earnings-related pension costs to pension providers. The specification is done based on laws, regulations and criteria for the division of costs confirmed by the Ministry of Social Affairs and Health.
Each pension payable under the Employees Pensions Act or the Seafarer’s Pensions Act is divided in the specifications of the division of costs according to the partly-funded financing technique into two parts: the funded part and the pooled component under the PAYG system. The funded component is always the liability of the pension provider that has insured the employment relationship, but the non-funded part, or the pooled component, is the joint liability of all pension providers.
For the specification of the division of costs, pension providers submit detailed data to the Finnish Centre for Pensions on the earnings-related pensions and related benefits they have paid. Pension providers also submit information on the contributions based on the insured workers’ wages and self-employed persons’ sum of earned income of the insured with the pension provider. Based on these, the Finnish Centre for Pensions divides the costs of the pension components between the pension providers.
The Finnish Centre for Pensions calculates the items that are the liability of each pension provider and submits this information to the pension providers to handle the money flows relating to the specification. The specification is largely automated both at the pension providers and at the Finnish Centre for Pensions.
If the pension provider has paid a larger share of the pension recipients’ pensions than it should, the Finnish Centre for Pensions pays the difference to the pension provider. If the situation is the other way around, the pension provider pays the difference to the Finnish Centre for Pensions.
The money flow in the division of costs is extensive, so they are specified in advance during the year through projections of the division of costs. The specifications relating to the costs of pensions has no cost effect on the Finnish Centre for Pensions.