Pension indicators

Finnish Centre for Pensions, Reports 04/2018

This review has compiled the key indicators used in assessing pension policy. It offers a concise and comprehensible overview of the realised development of the length of working lives, pension levels and the estimated costs of the future development. The review is directed at decision-makers and all interested in the future outlook of pension provision.

This page holds the core indicators of the different subject areas, grouped under three main headings. You can flick through the indicators by clicking the dots.

Lenght of working life

Expected effective retirement age

Expected effective retirement age in 2003–2017, all retirees on earnings-related pension

Expected effective retirement age in 2003–2017, all retirees on earnings-related pension

The expected effective retirement age depicts the average retirement age for insured persons of a certain age when presuming that the retirement risk and mortality per age group does not change. Part-time pension retirees or partial old-age retirees are not included when calculating the expectancy.

The expected effective retirement age can be calculated for persons at any age. The expectancy for a 25-year-old has been selected as the basic indicator.

The expectancy for a 25-year-old has risen by 2.3 years from the level prior to the previous pension reforms (2003). In 2017, the expected effective retirement age for a 25-year-old was 61.2 years. It rose by 0.1 year compared to in 2016. If a person aged 50 was still insured for an earnings-related pension and not retired in 2017, their expected effective retirement age was 62.8 years, that is, 1.6 years higher than that of a 25-year-old. The expected effective retirement age of the 50-year-old has remained unchanged since 2014.

Additional information: Effective retirement age in the Finnish earnings-related pension scheme. Statistics from the Finnish Centre for Pensions 03/2018

Expected effective retirement age in 1996–2050: realisation, goal and projection
In 2009 the government and central labour market organisations set as a goal that the expected effective retirement age of a 25-year-old should rise to 62.4 years by 2025. In order to implement the retirement age goal, government proposals to change the earnings-related pension acts were confirmed in January 2016. New earnings-related pension acts came into force on 1 January 2017.
The expected effective retirement age at the beginning of the 2000s was around 59 years. Following a moderate rise in 1996–2004, the expectancy increased appreciably in 2005–2014, largely in response to the phasing out of the unemployment pension from 2009. In the past few years, once that effect ceased to be in force, the average effective retirement age has remained virtually unchanged. In order to reach the target set for 2025, the expectancy should rise by 1.2 years from its level in 2017. The Finnish Centre for Pensions impact assessment of the 2017 pension reform projected that as the age limits for old-age pension are progressively raised, the targeted levels for expected retirement age should be reached by around 2025.  (Projections on the effects of the 2017 earnings-related pension reform: assessments based on the Government bill. Reports 05/2015).

Duration of active working life and duration of employment

Duration of active working life and duration of employment for a 15-year-old in 2008–2017

Duration of active working life and duration of employment for a 15-year-old in 2008–2017

The duration of active working life depicts the average number of years a 15-year-old is expected to take part in the workforce during the remaining years of life, if the work force shares of the year in question would prove to be permanent.

The duration of employment depicts the average years that a 15-year-old person can be expected to be in employment or self-employment during the remaining years of life, if the rates of employment during the year in question would prove to be permanent. Its annual values are cyclical in the same way as the employment rate.

The calculations are based on data from the workforce research of Statistics Finland. The variables used are workforce share and employment rate. The calculations have been carried out at the Finnish Centre for Pensions.

The duration of active working life has increased by just under one percentage point during the period under review. With the exception of some fluctuation in the wake of the 2008 financial crisis, the duration of employment has remained steadily at around 34 years.

The difference, about three years between the duration of active working life and the duration of employment is due to unemployment.

Employment rate

Employment rate by age group in 2008–2017

Employment rate by age group in 2008–2017

The employment rate is the percentage share of employed persons in the population of the same age. The review is based on the annual average values of the labour force survey by Statistics Finland. Normally, the employment rate is calculated as a percentage share of same-age population among the employed between 15 and 64 years of age. This being the case, 65–69-year-olds do not impact the employment rate of the population as a whole.

As employed is considered a person who, during the survey week, was in gainful employment and receiving monetary salary for at least an hour or fringe benefits for work, or profit if self-employed, or someone who has been temporarily off work.

The employment rate rose in the 2000s, right up until the financial crisis of 2008. Development has been particularly favourable in the age cohorts of those who have turned 55.

Since 2008, the employment rate among 55–59-year-olds has been higher than in the whole working age population. The employment rate in this age cohort has trended upwards and in 2017 reached its highest level since 2000 (76.0 per cent), edging up 0.84percentage points from the previous year.

Employment has also improved significantly among the 60–64-year-olds. Since the financial crisis the employment rate in this age group has reached a new record for the 2000s and was last year 49.2 per cent. In 2017 it was up 1.8 percentage points from 2016.

The employment rate for the 65–69-year-olds has improved, particularly after the 2005 pension reform. The likely main reason for this is that the age when the insurance obligation ends has risen from 65 to 68 years. Before the reform, the employment rate of this age group was around 5 per cent. In 2015 it was 14.2 per cent, nearly three times as high as at the turn of the century. After that it was gone down by 0.7 percentage points in the last two years to 13.5 per cent.

Despite strong employment trends in the 55+ population, the employment rate for the total population has remained persistently around the 70 per cent mark. A return to the level in 2008 has seemed almost unattainable. Yet, in 2017, the employment rate rose by 0.9 percentage points to above the level in 2007. With a continued favourable economic development, the average employment rate for the total population in 2018 may exceed the pre-financial crisis level of 2008 (70.3%).

Working life length of new retirees

The length of working lives of retirees in 2017, years

The length of working lives of retirees in 2017, years

By length of working life is here meant the duration of the time, in months or years, of coverage by the earnings-related pension scheme. In such cases, working life only includes employment insured for earnings-related pensions or self-employment. In this review, a person is considered to have been at work during a specific month, if he or she has been employed or self-employed and insured for earnings-related pensions during said month, according to register information.

A person’s working life begins no earlier than from the beginning of the month following their 17th birthday: this is the age at which pension begins to accrue. Until the end of 2016 the lower age limit was 18 years. Since the review ends with retirement, the working life does not comprise work carried out alongside receiving a pension, if the pension in question is not part-time pension. The information is based on the statistical registers of the Finnish Centre for Pensions.

In recent years the average length of working life has been stable at just under 33 years. The median is around four years higher. There has been little movement in this figure in recent years, but it seems that the median length of working life is now on a slight downward trend. At the same time as increasing numbers are transitioning directly from work into old-age retirement, the average length of working life for those retiring on old-age pension seems to be getting shorter. Trends over the past few years indicate that retirement on disability pension is also happening after shorter average working histories. For the time being these shifts are nevertheless  so small that it would be premature to talk about a turnaround in this trend. Since the distribution of working life length is heavily skewed, the median provides a more robust measure than the average. Based on the median, over half of all new earnings-related pension retirees in 2017 had worked for at least 37.0 years before retiring.

Since some of the new retirees have left working life behind due to disability, which shortens working lives, it is natural that we should review those retiring on an old-age pension and their working lives separately. The length of working lives of those retiring directly on old-age pension in 2017 was 35.4 years on average, and the median was 38.8. In other words, half of all new old-age retirees worked at least for 38.8 years before retiring.

The working lives of men retiring on an old-age pension were 1.4 years longer than those of women. The difference between men and women is slightly bigger when considering all new retirees (1.6 years). Parental leave and periods of caring for a child are most likely the reason for differences between men and women in this case. In addition, the average effective retirement age for men is slightly higher than that for women: 60.9 years for men and 60.7 years for women in 2017. The median retirement age was 63.1 years for both genders.

Level of pensions

Average total pension in one’s own right

The average total pension in one’s own right by pension benefit in 2008–2017, in 2017 currency

The average total pension in one’s own right by pension benefit in 2008–2017, in 2017 currency

The average total pension in one’s own right depicts the average total pension of persons resident in Finland and receiving old-age or disability pension from the earnings-related and/or national pension scheme. The pension contains the individual’s own earnings-related and national pension as well as surviving spouse’s pension. The total pension also comprises special provision pensions (The Motor Liability Insurance Act, The Occupational Accidents, Injuries and Diseases Act, The Act on Compensation for Military Accidents and Service-Related Illnesses, The Act on Compensation for Accidents and Service-Related Illnesses in Crisis Management Duties) as well as front-veterans’ supplements, child increases and guarantee pensions paid by Kela (the Social Insurance Institution).

The average total pension of old-age pension recipients has seen a real growth of 17 per cent during the time period.

The average total pension of those receiving a full disability pension has remained at the same level throughout most of the period under review. The total average pension of those receiving a partial disability pension has also remained fairly stable during the period under review. According to the definition, the partial disability pension is half the size of a full pension. Partial disability pensions are, however, relatively speaking better than full pensions. In 2017 the total average pension of those receiving partial disability pension was 69 per cent of the total pension of those receiving a full disability pension.

Average total pension in one’s own right in relation to average earnings

The average total pension in one’s own right in 2008–2017, in percentage of the annual average earnings of the year in question by pension benefit

The average total pension in one’s own right in 2008–2017, in percentage of the annual average earnings of the year in question by pension benefit

The average total pension in one’s own right depicts the average total pension of persons resident in Finland and receiving old-age or disability pension from the earnings-related and/or national pension scheme. The pension comprises the individual’s own earnings-related and national pension as well as surviving spouse’s pension. The total pension also comprises special provision pensions (The Motor Liability Insurance Act, The Occupational Accidents, Injuries and Diseases Act, The Act on Compensation for Military Accidents and Service-Related Illnesses, The Act on Compensation for Accidents and Service-Related Illnesses in Crisis Management Duties) as well as front-veterans’ supplements, child increases and guarantee pensions paid by Kela (the Social Insurance Institution).

The average earnings are based on the average wages and self-employment income of different professions, as reported in the income distribution statistic of Statistics Finland.

The income ratio of all pension recipients and the working population has remained around 50 per cent throughout the entire period under review. There was a slight decline in the latter half of the 2000s, but towards the end the level once again rose to what it had been at the start of the review period. The income ratio has remained virtually the same due to the development in old-age pensions. The average old-age pension in relation to the average income of the working population has remained around 50 per cent, and even exceeded it in the last few years. Moderate changes in average earnings have also affected the
development of the income ratio in recent years.

The status of recipients of a full disability pension in relation to people still in the labour market has slightly weakened during the period under review. For recipients of disability pension, the income ratio to the working population decreased from 38 per cent to 36 per cent. The income ratio between recipients of a partial disability pension to the working population has been approximately 25 per cent throughout the period under review.

Average total pension in relation to average earnings, 2015–2085

The average total pension in one’s own right in 2015 currency and percentage rates from the average earnings of each year in 2015–2085

The average total pension in one’s own right in 2015 currency and percentage rates from the average earnings of each year in 2015–2085

The estimated development of the average total pension in one’s own right from 2015 to 2085 is based on the long-term projections of the Finnish Centre for Pensions from the year 2016 (Statutory pensions in Finland – long-term projections 2016. Finnish Centre for Pensions, Reports 02/2017).

The average total pension in one’s own right depicts the average total pension of persons resident in Finland and receiving old-age, disability or unemployment pension from the earnings-related and/or national pension scheme. The pension contains the individual’s own earnings-related and national pension as well as surviving spouse’s pension. The total pension also comprises special provision pensions (The Motor Liability Insurance Act, The Occupational Accidents, Injuries and Diseases Act, The Act on Compensation for Military Accidents and Service-Related Illnesses, The Act on Compensation for Accidents and Service-Related Illnesses in Crisis Management Duties) as well as front-veterans’ supplements, child increases and guarantee pensions paid by Kela (the Social Insurance Institution).

From 2015 to 2085 it is projected that the purchasing power of the average pension will more than double. At 2015 price level, the pension will increase from just over EUR 1,600 to around EUR 3,700 a month. The rise in pension purchasing power is mainly attributable to rising earnings levels.

In 2015, the average pension was just over half the average earnings of the insured. The ratio of earnings-related pensions to earnings level is still slowly rising due to slow growth of average earnings and the earnings-related pension scheme maturing. From the 2020s onwards, however, earnings growth will begin to outpace pensions growth. This is mainly due to the life expectancy coefficient. In addition, the discontinuation of the final salary principle in 2005 and higher accrual rates in the public sector compared to the private sector in the 1990s, both contributed to reduce the average pension to average earnings ratio.

Pensions paid out by Kela are indexed to wage growth and consumer price inflation, at 50 per cent each. For this reason Kela pensions grow more slowly than earnings. By 2085 the ratio of the average pension to average earnings will settle at the level of 44 per cent.

Pension replacement rate

The pension replacement rates of those retiring from work in 2017

The pension replacement rates of those retiring from work in 2017

In this instance, the pension replacement rate is defined as depicting the earnings-related pension percentage share of the earnings level preceding retirement, of a person retired on an earnings-related pension. The earnings-related pension includes all pensions in one’s own right paid as earnings-related pensions. The earnings level has been determined two and three years before the pension contingency year, based on earnings received.

Included in the review are persons who retired on an earnings-related pension in 2017 and had earnings from work during the years 2014 and 2015. Excluded from the review are thus those new retirees who did not have earnings during the two calendar years under review. Part-time pension recipients have also been excluded from the review during that time. The limitations screened out approximately half of all new retirees. Many left outside the review retired as a result of disability or unemployment.

The earnings have been indexed to the statistical year by the cost-of-living index.

The pension replacement rate for people retiring in 2017 who were part of the research was 60 per cent on average. The replacement rate varies greatly. If earnings from the last working years differ significantly from the average earnings of one’ whole working life, the replacement rate may be very high or it may be very low. The replacement rate median was 58 per cent, and that describes the average pension replacement rate fairly well. Every second replacement rate was between 47–67 per cent. The replacement rate was slightly higher for males than for females.

The replacement rate for wage earners was slightly lower than that of the self-employed. The divergence was also smaller than for the self-employed. In 2017, the replacement rate of the wage earners was 58 per cent on average and the median was 57 per cent.

The presented basic replacement rates are, by nature, quite stable. Changes take place slowly. There is a downward trend in the average rates: they have decreased by one percentage point per year. In 2012, the average replacement rate of the new retirees was 66 per cent. The changes in median or quartile figures have been minor.

Calculation of the development of theoretical pension replacement rates

Calculation of the development of theoretical pension replacement rates

Calculation of the development of theoretical pension replacement rates

By theoretical pension replacement rate is meant the amount of the starting pension in relation to the last earned wage calculated with the help of pension models. With the help of these models. it can be seen how the rules determining the level of pension affect the level of the starting pension.

The replacement rate has been calculated based on the assumption that the working life has begun at the age of 25 and continued without interruption until retirement. In the calculation. earnings are assumed to have developed according to an undulating earnings profile. where the earnings are 75 per cent of average earnings at the start of the working life and 105 per cent at the end. The same earnings profile has been used in the EU when calculating the theoretical replacement rate indicator.

The assumptions used in the projection are based on the latest projections of the Finnish Centre for Pensions.  Above we describe the theoretical replacement rates of three different cohorts born in 1955, 1962 and 1985. The calculation provides a replacement rate for the same cohort according to retirement age. The working life is expected to be equally long for the different cohorts.

Theoretical pension replacement rates are lowered as we go from the oldest cohort to the youngest. According to the population forecast, life expectancy will be extended. meaning that the life expectancy coefficient will lower the pension level and replacement rate. Working longer improves the replacement rates in each cohort.

Pension expenditure and financing

Statutory pension expenditure in relation to the gross domestic product

Statutory pension expenditure in relation to the gross domestic product in 2005–2085, %

Statutory pension expenditure in relation to the gross domestic product in 2005–2085, %

The estimate is based on the long-term projections of the Finnish Centre for Pensions from the year 2016 (Statutory pensions in Finland – long-term projections 2016. Finnish Centre for Pensions, Reports 02/2017).

Prior to the onset of recession in autumn 2008, statutory pension expenditure stood at about 10 per cent of GDP. GDP dropped in 2009, but pension expenditure increased, which sharply drove up the pension expenditure to GDP ratio. It is expected that relative expenditure will continue to grow until the early 2020s, when pension expenditure will account for just under 14 per cent of GDP.

Over the next few years expenditure growth will mainly be the result of the increasing average pension and rising number of pensioners, while GDP growth will remain slow. Thereafter, over the next 30 years, the pension expenditure to GDP ratio will fall back to around 12 per cent. This will primarily be due to delayed retirement and a reduced average pension to average earnings ratio.

In the latter half of the century, the trend towards delayed retirement will slow and the growing share of pensioners in the population will turn the pension expenditure to GDP ratio onto a slight upward path.

Earnings-related pension expenditure in relation to the sum of earnings

Earnings-related pension expenditure in relation to the sum of earnings in 2005–2085, %

Earnings-related pension expenditure in relation to the sum of earnings in 2005–2085, %

Estimate of the development of earnings-related pension expenditure in relation to the financial bases, in other words the sums of earnings per economic sector is based on the long-term projections of the Finnish Centre for Pensions from the year 2016 (Statutory pensions in Finland – long-term projections 2016. Finnish Centre for Pensions, Reports 02/2017).

Pension expenditure in relation to income from work is on different trajectories in the public and private sectors. In the private sector, the expenditure ratio in 2015 was 26.9 per cent. The ratio will fluctuate within the range of 27 and 29 per cent through to 2060, and then turn to moderate growth. In 2015 public sector earnings-related pension expenditure stood at 39.2 per cent of the public sector payroll, and expenditure will continue to rise until 2024. At this point the expenditure ratio will reach 45 per cent, before beginning to slowly edge back to 33 per cent.

The persistently high public sector expenditure ratio has its background, firstly, in the fact that pension benefits in the public sector used to be more generous than in the private sector; and secondly, in privatizations that have resulted in employees transferring to the private sector. In the long term, the public and private sector expenditure ratios will move ever closer to each other with the increasing convergence of benefit rules.

The total amount of earnings-related pension expenditure includes the pension expenditure accrued from periods of study and caring for a child at home (VEKL). This is not, however, included in sector-specific expenditure.

Expenditure and contribution rates under the Employees Pensions Act

Expenditure and contribution rates under the Employees Pensions Act in 1962–2085

Expenditure and contribution rates under the Employees Pensions Act in 1962–2085

The realised and projected development of pension expenditure and contributions in the private sector in relation to the corresponding wage sum is based on the long-term projections of the Finnish Centre for Pensions from the year 2016 (Statutory pensions in Finland – long-term projections 2016. Finnish Centre for Pensions, Reports 02/2017).

Since the introduction of the Employees’ Pensions Act (TEL), private sector pension expenditure growth has almost continuously outpaced payroll growth. This is because of population aging and the phasing in of new benefits. However this trend is set to be reversed over the next few years, and in 2020–2050 the pension expenditure to payroll ratio will decline by just under two percentage points. This change will be due to delayed retirement and a reduced average pension to average earnings ratio. In the latter half of the century, the trend towards delayed retirement will slow and the growing share of pensioners in the population will turn the pension expenditure to payroll ratio onto an upward trend.

The spike in the expenditure ratio in the 1990s was caused by the reduced payroll during the recession. Since 2009, under the conditions of a sluggish economy and growing pension expenditure, the expenditure ratio has risen sharply.

Part of private sector employees’ earnings-related pensions are prefunded. This explains why pension contributions exceeded pension expenditure up until 2012. Since 2013 the yield on pension assets has made it possible to keep the contribution rate lower than expenditure. The long-term projection for the contribution rate is not based on spending pension assets; rather, the pension assets at the end of the calculation period in relation to the payroll are higher than they were at the beginning of the projection period.

Accrued pension rights and the funding ratio

Pension funds, accrued pensions rights and the funding ratio in 2014 and 2015, with a real discount rate of 2.5 per cent. The money amounts are at current prices.

Pension funds, accrued pensions rights and the funding ratio in 2014 and 2015, with a real discount rate of 2.5 per cent. The money amounts are at current prices.

By capital value of pensions accrued up to a certain point is meant the amount of money that would be sufficient to fund pensions accrued up to that certain point in time.

The estimates of the accrued pension rights are based on the long-term projections of the Finnish Centre for Pensions from the year 2016 (Statutory pensions in Finland – long-term projections 2016. Finnish Centre for Pensions, Reports 02/2017).

The amount of earnings-related pension funds refers to the current value of earnings-related pension institutions’ investment assets at the end of each year. This is significantly affected by annual fluctuation in investment returns. The growth in pension funds in 2015 is largely explained by good investment returns.

The value of accrued pensions has been calculated using a 2.5 per cent real discount rate. The value of earnings-related pensions accrued by the end of 2015 totalled EUR 721.9 billion, three and a half times the value of 2015 GDP.

The funding ratio is obtained by dividing the amount of earnings-related pension assets by the capital value of accrued pensions. This key figure shows to what extent pensions can be financed from pension funds already accrued and from the future yield of these funds. At year-end 2015 the funding ratio for the whole earnings-related pension scheme was 25.0 per cent, while the figure for the Employees Pensions Act was 27.0 per cent.