Pension Reform in 2017
The social partners (Confederation of Finnish Industries, Local Government Employers, The Central Organisation of Finnish Trade Unions SAK and The Finnish Confederation of Professionals STTK) reached an agreement on a proposal of changes to pensions on 26 September 2014. The government bill was presented to Parliament on 3 September 2015 and passed in November 2015. The President of the Republic of Finland confirmed the acts in January 2016. This reform took effect from the beginning of 2017.
On 11 June 2019, the social partners signed an agreement on issues relating to the continuing negotiations of the 2017 pension reform. In this connection, the social partners agreed, among other things, on issues relating to the reform of survivors’ pensions and the right to additional days of the unemployment allowance. They also agreed to commission different reports on, for example, the development of disability pensions, rehabilitation and earnings-related pension funding.
The discussion on prolonging working life took fire on the basis of the Council of State’s proposal on 24 February 2009 to gradually raise the retirement age to 65 years. The social partners did not accept the proposal and public opinion opposed it strongly, as well.
On 11 March 2009, The Council of State and the social partners agreed on initiating negotiations to extend working lives. The labour market organisations’ pension negotiation group (the so-called Rantala group) and the group appointed to consider issues of wellbeing at work (the so-called Ahtela group) began drawing up definitions of policy with which the expected effective retirement age would be raised with three years by 2025.
Rantala’s group did not reach consensus by the set deadline. The main issue causing disagreement was the abolishment of the so-called unemployment path to retirement. If the unemployment path to retirement was abolished, it would mean that those who become unemployed at an older age would not receive an unemployment allowance after the transition period until retirement but only for a maximum of 500 days, as is the case for younger employees.
Ahtela’s group, on the other hand, agreed on many issues relating to working lives and occupational health care by the beginning of 2010. The group suggested that six new working groups be established to continue the preparatory work. In the end, three groups were established. Ahtela’s group presented several proposals:
- making occupational health care more efficient and accessible,
- promoting and supporting wellbeing at work, and
- developing education and skills so that they would promote an extension of working lives.
In the spring of 2010, the Council of State established groups to prepare the programme for sustainable economic growth and employment. One of these groups was the Working Life group. Its task was to consider the following issues:
- securing an adequate earnings-related pension level,
- the sustainability of the financing of the pension scheme, and
- the raising of the average effective retirement age.
The Working life group handed in its report to the Prime Minister on 1 March 2011. The report was an extensive review of the alternative ways in which the earnings-related pension system could be developed. The report presents indicators which can be used to monitor how pension policy aims are realised. The Working Life Group emphasises that the report presents the various reform alternatives but does not take a stand on how realisable they are.
The other two spin-off groups of Jukka Ahtela’s working life group also handed over their report to the Prime Minister on 1 March 2011.
In September 2011, the Minister of Social Affairs and Health, Paula Risikko, suggested to the social partners that their Pension Negotiation Group would, as soon as possible, turn the reports into measures with which the aims to extend working lives included in the government platform would be achieved. Outi Antila, director general of the Ministry of Social Affairs and Health, Jukka Pekkarinen, director general of the Ministry of Finances, and Merja Ailus, Managing Director of Keva, would be expert members of the group when the suggestions for measures would be compiled.
The Pension Negotiation Group handed in its first interim report to the Minister of Social Affairs and Health on 17 February 2012. The second interim report was finished on 22 March 2012 in time for the government discussion on spending limits. It included some concrete suggestions concerning, for example, the qualifying ages for the part-time pension and the unemployment pathway to retirement.
Wider decisions on retirement ages, the fate of early and survivors’ pensions and issues relating to how pensions would be determined were left to be decided after the work of the Jukka Pekkarinen was done. The reform relating to them was suggested to come into force in 2017.
Aim of the reform
The aim of the reform was to secure a sustainable financing of earnings-related pensions and secure adequate pensions and intergenerational fairness.
The sustainability of pensions was to be secured by postponing the average retirement age. The aim was to raise the expected effective retirement age to 62.4 years. One concrete aim of the reform was to reduce the sustainability gap of public finances by one percentage points by extending working lives. This way, pension levels could also be raised.
Changes to benefits
Old-age pension starts to accrue as of age 17 (previously as of age 18). As of 2017, pension accrues at a rate of 1.5 per cent of the annual earnings, from which the worker’s earnings-related pension contribution is no longer deducted after 2016. For workers aged 53-62, pension accrues at a rate of 1.7 per cent until 31 December 2025. Those with a higher accrual rate during the transition period also pay a 1.5-percentage-point higher earnings-related pension contribution. For work during retirement, the accrual rate is 1.5 per cent, as before.
Pension accrues until the age when the insurance obligation ends. This age rises as the retirement age rises, but it is increased in full years. The difference between the retirement age and age when the insurance obligation ends is five years at most. That means that also for those born in 1957, the insurance obligation ends at age 68. The insurance obligation ends at age 69 for those born 1958–1961 and at 70 for those born 1962–1964.
The life expectancy coefficient introduced in the 2005 pension reform remains. The calculation of the life expectancy coefficient is amended by taking into account the change made to the retirement age when the retirement age rises to above 65 years. At that time, the life expectancy coefficient will cut the benefit level less than it would have done under previous legislation.
The retirement ages rise gradually by three months per year until 2027. The first age group whose retirement age rises is those born in 1955. The first age group whose retirement age is 65 years is those born in 1962. Also for those born in 1963 and 1964, the retirement age is 65 years. As of those born in 1965, the old-age pension retirement age will be linked to life expectancy. It is estimated to rise by 1-2 months per age group.
The retirement age will rise so that the ratio between the imputed working life (time from age 18 to the retirement age) and the life expectancy of a pensioner will remain stable. The life expectancy in the calculation is examined at the retirement age. The need to raise the retirement ages are assessed at regular intervals based on, among other things, based on the development of working life ratio (expected time in the labour force/expected life expectancy of 18-year-olds; 5-year average values).
If the pension is taken late, the pension will be increased with an increment for deferred retirement. It is 0.4 per cent for each deferred month.
Target retirement age
The target retirement age is calculated and stated in the pension record sent to workers five years before reaching the retirement age. The target retirement age indicates the age to which a person would need to postpone taking out their pension in order to have the increment for deferred retirement compensate the reduction made to the pension through the life expectancy coefficient. The final target retirement age can be calculated for the year in which the person turns 62 years.
As the retirement age rises, the termination age of the projected pension component of the disability pension will also rise. The projected pension component is calculated based on the retirement age confirmed for the age cohort closest to the worker in the year of the pension contingency. The extended projected pension component raises the level of disability pensions. On the other hand, the mitigated life expectancy coefficient is applied to the total disability pension when the retirement age is over 65 years. Applying the life expectancy coefficient also to the pension component for projected pension component means that the level of the starting disability pension will be reduced.
The accrual rate for the projected pensionable service remains at 1.5 per cent. The earnings received in 2017 and later are no longer reduced by the amount of the worker’s earnings-related pension contribution for the five-year-period of the projected pension component.
The pension can also be granted as a years-of-service pension if the applicant has turned 63 years and has done work that requires great mental or physical effort for at least 38 years. In addition, the applicant’s ability to work must be reduced, but less so than for the actual disability pension.
The years-of-service pension does not include a projected pension component. The qualifying age for the years-of-service pension will rise in line with life expectancy in the same way as the old-age retirement age will rise after 65. The years-of-service pension can be granted if the conditions are met and if no more than a year has passed since the working ended.
Part-time pension and partial old-age pension
The partial old-age pension replaced the part-time pension since the beginning of 2017. The pension can be drawn at age 61 at the earliest. As of the beginning of 2025, the age limit will be 62. The qualifying age for the years-of-service pension will rise in line with life expectancy in the same way as the old-age retirement age will rise after 65.
There are no limits to the amount of work that can be done while drawing a partial old-age pension. The pension can be either 25 or 50 per cent of the earnings-related pension that has accrued by the end of the previous year in which the pension begins. The partial old-age pension is reduced if taken out before the retirement age. The part of the pension that is taken out early is permanently reduced by 0.4 per cent for each month from when the pension is drawn to the month of reaching the retirement age. The partial old-age pension is also adjusted with the life-expectancy coefficient. The partial old-age pension can also be deferred. If the partial old-age pension starts after the person has reached their retirement age, the portion taken out is increased by 0.4 per cent for each month from the retirement age to the month in which the partial old-age pension is drawn.
If the partial old-age pension is first taken out at 25 per cent of the accrued pension, the share can later be raised to 50 per cent. If the initially chosen share is 50 per cent, it cannot be reduced to 25 per cent later. It is possible to terminate the partial old-age pension within the first three months, but not after that. You can earn new pension while drawing a partial old-age pension. For work done while drawing a partial old-age pension, new pension accrues at a rate of 1.5 per cent of the monthly wage. The 1.7-per-cent accrual rate valid during the transition period is also applied to pension earned while drawing a partial old-age pension. If the worker wants to work part-time on a regular basis while drawing a partial old-age pension, the employer must try to make that possible.
TyEL contribution rate
In 2017-2019, the average contribution under the Employees Pensions Act was 24.4 per cent. The EMU buffer can be used to adjust the contribution with separate decisions. After that, the contribution level is aimed to develop steadily and appropriately to secure the benefits and their financing in the long run.
Old-age pension funding under TyEL
Between the ages of 18 and 68, old-age pension assets are funded to an amount equalling 0.4 per cent of the accrual until the worker starts drawing an old-age pension under the Employees Pensions Act. In connection with the 2017 pension reform, the old-age pension liabilities were supplemented to meet this development. The supplement of the mortality assumption was financed by using assets intended for additional funding of old-age pensions and by dissolving the equalisation amount reserved for fluctuations in the insurance business.
The old-age pension funding was supplemented from the provision for pooled claims in 2017 and 2018. The amount used for the supplement in 2017 equalled 0.4 per cent of the TyEL wage sum. The amount used for the supplement in 2018 equalled 1.5 per cent of the TyEL wage sum.
TyEL provision of pooled claims and EMU buffer
The provision for pooled claims is a joint buffer fund under the Employees Pensions Act, used to prepare for the annual fluctuation in the jointly financed pension expenditure. The lower limit of the provision for pooled claims was changed so that, in the future, it is 20 per cent of the pooled pension expenditure for the year to come. The regulations relating to the use of the EMU buffer included in the provision for pooled claims is clarified in the reform. The EMU buffer can be used to adjust the TyEL contribution by a maximum of 0.8 per cent of the annual wage sum. When using the EMU buffer, it is agreed over how long a period the assets are to be recollected into the EMU buffer as the employment and financial situation improves.
Solvency under TyEL
As of the beginning of 2017, the equalisation provision merged with the solvency margin into one buffer, which is used to provide for fluctuations in insurance and investment operations.
The equity-linked buffer fund under TyEL
The equity-linked buffer fund under TyEL is a joint buffer fund which has made it possible to transfer some of the risks involved with equities to be carried by the entire system.
The equity-linked ratio will grow gradually from 10 to 20 per cent. The change makes it possible to increase the share of equity investments in the TyEL system. The upper limit of the equity-linked buffer fund has been set at 1 per cent and the lower limit at -20 per cent of the technical provision. The equity weight of the investments of a single earnings-related pension insurance provider has been set at a maximum of 60 per cent of all investments.
Experience rating model of disability pensions
The collected disability pension contribution is partly determined based on the experience rating model. The experience rating model of disability pensions was adjusted so that certain disability cases, including the years-of-service pensions, do not affect he determining of the experience rating model.
The retirement age of the national pension will be 65 years until the age cohort born in 1964. The retirement age of those born in 1965 or later will rise in line with changes to the expected life expectancy in the same way as the retirement age of the earnings-related pension system.
The early old-age pension will be abolished gradually. For persons born before 1958, it is 63 years, and for persons born between 1958 and 1961, it is 64 years. Persons born in 1962 or later no longer receive an early old-age pension.
The increment for deferred retirement, which is paid after the age of 65 goes down from 0.6 to 0.4 per cent per month for persons born in 1962 or later.