Life expectancy coefficient and how it is determined
When a pension starts, it is multiplied by the life expectancy coefficient. It affects the amount of the pension permanently. The life expectancy coefficient was entered into the Finnish earnings-related pension acts in connection with the 2005 pension reform.
The purpose of the coefficient is to limit the growth in pension expenditure due to rising life expectancy and to defer retirement.
The life expectancy coefficient has been calculated as of 2009, when its value was one (1,00000). Based on the mortality rates for 2003–2007, the life expectancy coefficient was calculated for the age cohort born in 1947. Later age cohorts’ life expectancy coefficients are compared to this one. For the first time, the life expectancy coefficient affected pensions that started in 2010.
The life expectancy coefficient is determined for each birth cohort at age 62. It will not change after it has been confirmed.
Table: Confirmed life expectancy coefficients for different age groups
|Year in which the life expectancy coefficient was determined (at age 62)||Year of birth||Life expectancy coefficient||Effect of life expectancy coefficient on monthly pension, %||Life expectancy at 62, years|
Effect of life expectancy coefficient on monthly pension and total pension pot paid throughout retirement
As life expectancy rises, the life expectancy coefficient reduces the monthly pension. However, if the pension recipient lives until the age that corresponds to the extended life expectancy, the life expectancy coefficient does not reduce the total amount of pension received by the pensioner throughout retirement compared to those born in 1947. The reducing effect of the life expectancy can be offset by deferring retirement.
To assess how much retirement must be deferred to offset the effect of the life expectancy coefficient, a target retirement age has been calculated for each birth cohort. The target retirement age indicates at what age the increase for late retirement is as large as the cut in the monthly pension caused by the life expectancy coefficient were the person to retire as soon as they reach their retirement age.
Determining the life expectancy coefficient
The life expectancy coefficient is determined separately for each birth year cohort for the year in which the cohort turns 62 years. For the first time, the life expectancy coefficient was determined for the base year 2009, in which the cohort born in 1947 turned 62 years. At the time, its value was 1.00000.
The Finnish Centre for Pensions calculates the value of the life expectancy coefficient annually. It is defined so that the capital value of the pension adjusted with the coefficient is the same as the unadjusted capital value of the pension in the base year 2009. The capital value of the pension means the assumed total amount of pension paid throughout a person’s life, taking interest rates and mortality into account.
The Finnish Centre for Pensions calculates the capital value used to calculate the life expectancy coefficient (the longevity indicator, that is, the capital value of a pension of one euro) by using the statutory interest rate of two per cent and the mortality risk rates of Statistics Finland’s mortality statistics for the last five years. When calculating the longevity indicator for the base year 2009, the mortality risk rates of the mortality statistics for 2003–2007 were used.
From 2009 forward, the longevity indicator either decreases or increases, depending on the evolution of mortality. As life expectancy grows, the longevity indicator grows. Correspondingly, if life expectancy decreases, the longevity indicator decreases.
The life expectancy coefficient is calculated by comparing the longevity indicator of the year under review with the longevity indicator of the base year 2009. If the longevity indicator increases, the life expectancy coefficient decreases compared to the previous year. Since the earned pension is multiplied by the life expectancy coefficient, the monthly pension amount decreases.
The life expectancy coefficient is calculated to five decimals. The value of the coefficient is the same for men and women, as are all other parameters in the Finnish pension system.
For the first time, a life expectancy coefficient that deviated from the baseline value was calculated in November 2009 for the year 2010. The first age cohort that was affected by the life expectancy coefficient was that of 1948.
As of 2027, the life expectancy coefficient will be determined in a different way since the retirement age will be linked to the expected life expectancy. The capital value of a pension adjusted with the life expectancy coefficient and calculated at the retirement age is the same as the capital value of a pension adjusted with the life expectancy coefficient confirmed for 2026 at age 65.
The Ministry of Social Affairs and Health issues a decree on the value of the life expectancy coefficient for the next year by the end of November at the latest.