Pension contributions are defined to cover the costs of pensions and the management of pension insurance. For example, the old-age pension contribution is influenced by the estimate of the life expectancy of the insured and is meant to cover the risk of longevity. The pension contribution cannot be thought as an investment.
Private sector contributions
Together with the investment returns on pension funds, the contributions under the Employees Pensions Act (TyEL) collected each year from employers and employees must cover:
- the pensions paid to retirees (jointly financed by the pension providers),
- the assets transferred from the contributions to the funds (the growth of the technical provisions),
- the administrative fees for pensions and insurance policies, and
- the contribution losses (insurance contributions that employers have failed to pay).
Employer’s TyEL contribution when insured by a pension insurance company
The insurance contribution of an employer that has taken out earnings-related pension insurance from a pension provider consists of two different components. One component is funded to cover future pensions and the other is used to finance pensions in payment and administrative fees of the year in question.
Average TyEL contribution components, year 2022:
- Old-age pension 3.6%
- Disability pension 1.1%
- Pooled component 20.35%
- Other 0.6%
- Estimated client bonuses -0.8%
- Average insurance contribution 24.85%
In 2022, the pooled component of the contribution under TyEL includes a 0.45-percentage-point component with which employers pay back the reduction in the TyEL contribution awarded to them in 2020. Employers pay back the total reduced amount over the period 2022 – 2025.
Part of the TyEL contributions, equalling 3.6 per cent of the earnings, is funded to pay for future old-age pensions. The old-age pension component is determined at a level that is sufficient to cover the funded components of the old-age pensions paid out in the year in question, taking into account the investment returns of pension funds and the mortality rates.
An amount equalling the growth of the pension accrual of 0.4 per cent of the earnings is funded for future old-age pensions. The remaining part of the pensions paid out as old-age pensions to retirees is financed with the pooled pension component.
Changes that affect the old-age pension component are rare. They include, for example, changes in the mortality assumptions that model people’s life expectancy. At the end of 2016, the mortality assumptions were changed due to extended life expectancy. The change led to a growth in old-age pension funds and the old-age pension component of the pension insurance contribution. The growth of funds was financed with from the pooled component.
The old-age pension component of the TyEL contribution is calculated for each employee separately. It depends on the age and gender of the employee. That means that the differences in the average life expectancy of men and women affect the size of the old-age pension component. However, the total contribution is evened out by the pooled component, which is why the TyEL contribution for men and women is the same.
The disability pension component of the TyEL contribution is funded and used to cover disability pensions paid before the pension recipients reach their retirement age. As a rule, the actuarial capital value (without index increases) of the entire starting amount of the pension is funded from the year in which the pension begins until the time that the retiree reaches their retirement age. The disability pension component is determined at such a level that the average component is high enough to cover half of the disability pensions that begin within the two years following the year in which the contribution is collected.
The disability pension component is assessed based on the most recent statistics, reports and projections on starting pensions. The disability pension component is affected by, for example, changes in the funding ratios of the pension as defined in law.
The disability pension component of the TyEL contributions depends on:
- the age of the insured employees,
- the wages paid by employers to employees, and
- the disability pensions granted by employers to employees compared to the average disability risk.
The pooled component of the TyEL contribution is used to cover the pension components jointly financed by the pension providers and paid out in the year of collecting the pension contributions. Jointly financed pension components and pensions include:
- the index increases of pensions,
- the components of the old-age and disability pensions that exceed the funded components,
- survivors’ pensions,
- part-time pensions,
- partial old-age pensions, and
- years-of-service pensions.
The majority (approximately 80%) of the paid out TyEL pensions are jointly financed.
The buffer fund of the pooled component of the TyEL contribution, that is, the provision for pooled claims, must cover at least one fifth of the following year’s jointly financed pension expenditure. The provision for pooled claims has been increased also to even out the pressure the raise the TyEL contribution in the 2010s and 2020s.
The pooled component of the TyEL contribution is linked to the age and gender of the employee. It is defined so that the total TyEL contribution is the same for all, regardless of age and gender. In other words, the differences in the pooled component of the TyEL contribution compensate the gaps in the old-age pension component of the contribution that depends on the gaps in average life expectancy for men and women.
The calculations and projections that relate to how the pooled component is determined are done by the Finnish Centre for Pensions. The projections of the pooled pension expenditure take into account changes in laws and the projections on the development of the national economy, including the growth in earnings levels and wage sums, inflation and unemployment.
The other components of the contribution cover:
- administrative expenses,
- statutory fees, and
- contribution losses.
The components for administrative expenses and contribution losses vary by employer in terms of, among other things, the wage sum (wages paid by the employer to the employees).
The statutory contributions cover the costs of:
- the Finnish Centre for Pensions,
- the Pension Appeal Court (judicial administration), and
- the Financial Supervisory Authority.
The client bonus is a reduction in the contribution of employers. The size of the reduction depends on the return of the pension provider’s investments and how efficiently the insurance policies and pensions are managed. Client bonuses are granted to contractual employers. If an employer changes pension provider, the client bonuses are paid for three years by the previous pension provider. Calculation criteria for client bonuses, specific for each pension provider, came into effect at the beginning of 2018.
The calculation criteria for the TyEL contribution that the pension providers collect from employers are prepared by working groups at The Finnish Pension Alliance Tela. The parties of the working groups include the actuaries of earnings-related pension providers and experts from the Finnish Centre for Pensions and the Ministry of Social Affairs and Health. The chairs of the working groups are rotating between the representatives from the earnings-related pension providers.
The calculations for the TyEL contribution are based on statistics, projections and calculations of the earnings-related pension providers and the Finnish Centre for Pensions. The central negotiating party when it comes to preparing the calculation criteria is the Pensions Negotiation Group, chaired by Mikko Kautto, Managing Director of the Finnish Centre for Pensions.
Authorised by the earnings-related pension providers, The Finnish Pension Alliance TELA requests the Ministry of Social Affairs and Health to confirm the grounds for the TyEL contribution.
- Private sector pension contributions
- Disability pensions under different pension acts
- Actuarial Principles and Insurance Terms and Conditions
Employer’s TyEL contribution in a company or an industry-wide pension fund
In company and industry-wide pension funds, the pension contribution resembles voluntary contributions. Nevertheless, it is defined according to the same basic principle as in earnings-related pension insurance companies: together with the return on investments, the contribution must cover
- the jointly financed pensions paid out to pensioners,
- the funded pension liability,
- the administrative costs of managing pensions and insurance policies, as well as
- the contribution losses caused by unpaid employer contributions.
The calculation criteria of company and industry-wide pension funds are compiled in line with the criteria of earnings-related pension insurance companies. The work is done by a working group led by the Ministry of Social Affairs and Health.
Determining the MEL contribution
The contribution under the Seafarer’s Pensions Act (MEL contribution) is determined based on technical calculations made by the Seafarer’s Pension Fund so that the contribution, together with the State share (31% of the MEL pension expenditure) and investment returns, is enough to cover the costs of
- the pensions paid under the Seafarer’s Pensions Act,
- the pooled pension component,
- the changes in pension liabilities, and
- the administrative expenses.
The Ministry of Social Affairs and Health confirms the MEL contribution. The employee’s share is equivalent to that of the employee’s share under TyEL.
Determining the YEL contribution
The contribution under the Self-employed Persons’ Pensions Act (YEL contribution) is determined based on the average rates under TyEL. The Ministry of Social Affairs and Health confirms the basic YEL contribution each year.
Newly self-employed get a reduction on their insurance contribution under YEL: 22 per cent for the first 48 months of self-employment. The reduction rate has varied over the years. Before 1992, small-scale employer’s got a reduction on their insurance contribution.
The size of the YEL contribution has been linked to the TyEL contribution since the Self-employed Persons’ Pensions Act came into force in 1970.
Determining the MYEL contribution
The basic contribution rates under the Farmers’ Pensions Act (MYEL contributions) are the same as for self-employed persons insured under YEL. However, the contribution rate of persons insured under MYEL depend on their age as well as on their insured income from work.
The reduced MYEL contribution rate is 54 per cent of the basic rate and it is applied to annual MYEL income below 28, 942.64 euros (2022). The basic rate is paid for income from work that exceeds 45,481.37 euros per year. For an annual income from work that falls between these two limits, the contribution rate rises gradually. As a result, the actual insurance contribution rate for all persons insured under MYEL falls somewhere between the reduced MYEL contribution rate and the basic contribution rate. The reduced contribution rates have been valid since the Farmers’ Pensions Act came into force. The reduced contribution was justified by the struggles of small-scale farms, the age structure of farmers and agricultural politics at the time that the act came into force. The reduction has been downsized over the years.
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Determining the pension contributions of the employees of Keva’s member corporations
The pension contributions of Keva’s member corporations are determined based on the wages paid to municipal workers and the public sector pension expenditure.
The wage-based pension contribution of the member corporations is based on an earnings-based pension contribution that is the same for all employers and an employer-specific disability pension contribution. The earnings-based pension contribution equals in size the average total contribution under TyEL, excluding the estimated average disability component of the TyEL contribution.
The disability pension contribution is determined based on the employer’s disability risk, and equals in size the average disability component of the TyEL contribution. The wage-based pension contribution of the member corporations also includes the worker’s pension contribution. The contribution rates for workers are the same as for other wage earners.
The disability pension contribution for large employers is determined in full, and for mid-sized employers, in part based on the employer’s disability risk. The disability pension contribution for small-scale employers equals the average disability pension contribution of the system. The disability risk of the employer is determined based on the realised starting full disability pensions and cash rehabilitation benefits of the past two years. A partial disability pension or partial cash rehabilitation benefit received before receiving a full disability pension or partial cash rehabilitation benefit is taken into consideration as a factor reducing the pension expenditure for a period of 24 months before receiving a full disability pension or cash rehabilitation benefit.
Some employers also pay a euro contribution based on pension expenditure. Employers that employed workers before 2005 who were getting a pension for municipal-sector work that year pay a contribution based on pension expenditure.
Since 1988, assets have been collected into a buffer fund to cover the rise in contributions for municipal pensions. As of the beginning of 2017, the paid contributions have no longer been enough to cover the paid pensions. Part of the pension expenditure is therefore financed with the investment returns of the buffer fund. Keva’s buffer fund is not allocated to individual persons as is the case with the buffer funds under TyEL. Keva aims at a stable and sustainable contribution level.
- Earnings-related Pension Contributions Under the Public Sector Pensions Act
- Disability Pensions under Different Pension Acts
Determining the pension contribution of State employers and employees
The State’s wage-based pension contribution consists of the earnings-based pension contribution and the disability pension contribution, as in the case of Keva’s member corporations. Based on a proposal presented by Keva, the Ministry of Finances determines the size of the earnings-based and the average disability pension contribution. The parameters required to calculate the earnings-based pension contribution and the disability pension contribution are determined so that the average level of the assessed pension contribution equals the average level of the TyEL contribution. The contribution rates for workers are the same as for other wage earners.
Keva confirms the contribution rates according to grounds decided by the Ministry of Finance.
- Earnings-related pension contributions under the Public Sector Pensions Act
- Disability pensions under different pension acts
Determining the pension contribution of the Evangelical Lutheran Church employers and employees
The employers of the Evangelical Lutheran Church pay a wage-based pension contribution in addition to a pension fund contribution that is based on the Church tax. The pension fund contribution aims at raising the Church’s pension fund until further notice. The Church pension fund aims to secure that the pension can be paid to Church workers and to even out the rise in parishes’ future pension contributions. The Church Pension Fund is a buffer fund, but unlike the buffer funds under TyEL, it is not linked to individual pension liabilities. The workers’ contribution rates are the same as for other wage earners.