Description of projection model
The main long-term projections are made using the long-term projection (LTP) model of the Finnish Centre for Pensions. The projections on pension expenditure cover statutory pensions, that is, earnings-related pensions, the national pension, the guarantee pension and special provision pensions. Financing projections are made for the private-sector earnings-related pension acts.
The Employees Pensions Act (TyEL) has been modelled as if it were managed by only one pension provider. This provides information and estimates of the average TyEL figures. However, the LTP model does not deal with the position of the various pension providers in relation to each other.
The LTP model consists of several interconnected modules, as presented in the figure below.
Structure of the LTP model
The population projection determines the number of people of a pensionable age at different times. Together with the employment forecast, it determines the size of the labour force. The number of retirees and the pension amounts together determine the pension expenditure.
The earnings-related pension expenditure is calculated separately for each pension act. For the Employees Pensions Act, financing projections are made, for example, to estimate the required TyEL contribution rate.
A semi-aggregated technique by pension act, age and sex is applied in the projections. For example, all working men aged 50 and covered by TyEL receive an equal wage. The averaging technique is technically simpler than the individual-level technique. However, the averaging technique does not provide information on the size distribution of pensions. Such results are obtained using the ELSI microsimulation model.
For the projection of national pensions, information on the current pension distribution as well as the projected distributions generated by the ELSI model are used.
Special provision pensions are determined based on the population forecast. The starting point for the projection is the current special provision pension expenditure, divided by age and gender. The total statutory pension expenditure is calculated as the joint result of the different modules.