Regulation on Pension Insuring

The responsibilities of the Ministry of Social Affairs and Health include preparation of legislation on insurance providers and insurance activities and a significant proportion of the issuing of provisions on a lower level.

Earnings-related pension provision is governed by the following acts:

  • Employee Pension Insurance Companies Act
  • Insurance Companies Act
  • Act on the Financial Supervisory Authority
  • Act on the Finnish Centre for Pensions
  • Act on the calculation of a pension provider’s solvency limit and on the covering of the technical provision (1114/2006, only in Finnish)
  • Pension Funds Act, and
  • Employee Benefit Funds Act

The Financial Supervisory Authority gives pension providers more detailed regulations and instructions on, for example, accounting and the annual accounts, coverage and calculation of the technical provisions as well as the solvency requirements.

Competition and cooperation

A pension provider’s task is to manage pension provision as part of the Finnish decentralised organisation of the earnings-related pension scheme. These tasks include awarding pensions, managing pension insurance policies and investing accrued pension assets.

The benefits of earnings-related pension insurance are defined strictly by pension acts. Thus, the pension providers cannot compete with the level of the benefit itself. The competition between pension providers includes improving the investment return, developing services and cost efficiency. Competition in these areas serves the interests of pension provision.

Under Finnish legislation, it is not possible to invest risk capital in an earnings-related pension insurance provider for the purpose of gaining a profit. Nor is it possible for an earnings-related pension provider to expand or change its line of business. In a market like this it is not justified to aim for growth as an intrinsic value.

As a rule, the legislation on competition is also applied to pension providers since they pursue economic activities as intended by the legislation on competition. However, when applying the legislation on competition, the pension providers have an exceptional status since they implement mandatory and statutory pension provision, which is mostly based on the principle of joint liability.

According to TyEL, the pension providers are obliged to cooperate in the preparation of the insurance terms and conditions, the actuarial principles, as well as in the gathering of statistical data and in other matters related to the implementation and development of the earnings-related pension acts.

The legislation on competition applicable to authorised pension providers is primarily the stipulations of the Treaty Establishing the European Union, and secondarily, the national Act on restriction of competition. The aim has been to harmonise the latter with EU legislation.

Stipulations on financial management of pension providers

The pension providers’ assets are to be invested productively and safely. Investing the assets productively involves risks. As a buffer against investment risks, pension providers have a solvency margin, which means a difference between assets and liabilities. The solvency margin enables increased investment in instruments with higher yield expectations but also higher risks.

A minimum solvency margin for pension insurance companies has been regulated at two thirds of the solvency limit.  The solvency limit is defined in risk-theoretical terms to correspond to the required solvency margin for one year, taking into account the distribution of the investments into various types of assets. The Farmers’ Social Insurance Institution, Keva and the State Treasury do not have corresponding regulations concerning their solvency margin.

In addition to the rules on solvency, the investment activities of the pension providers are governed by the rules on coverage of the technical provisions. Coverage of technical provisions implies ensuring the security of assets, their return on convertibility into money as well as the diversification of assets. There is a separate act on the coverage of technical provisions and the calculation of the solvency limit.

Pension insurance companies, industry-wide and company pension funds and specialised pension providers must also draw up an investment plan. The investment plans are regulated by the acts on earnings-related pension insurance (e.g. by the Employee Pension Insurance Company Act). In addition, the Financial Supervisory Authority issues more detailed regulations on the content of the investment plans.

The intention of the acts and the regulations and instructions issued by the Ministry of Finance and the Financial Supervisory Authority is to secure that the pension insurance companies are able to fulfil their insurance commitments.

The current solvency margin legislation has been valid since the beginning of 2007, amended by the aforementioned temporary act as of the beginning of 2008.

Liability in case of a pension provider’s bankruptcy

If a private sector pension provider goes bankrupt, the remaining private pension providers are collectively liable for the pension benefits. Pension providers in the private sector are jointly liable for these benefits in proportion to the earnings insured with the relevant pension provider.

The joint liability is prescribed in the Employees Pensions Act, section 181. More detailed provisions on the pension providers’ liability are issued through a decree of the Ministry of Social Affairs and Health. The joint guarantee scheme in case of bankruptcy emphasises the importance of supervising the solvency of pension providers.

Bankruptcy case from the 1990s: Expenses caused to the pension system due to the bankruptcy of the pension company Eläke-Kansa

The pension insurance company Eläke-Kansa was declared bankrupt on 30 December 1994. The insurance portfolio that it was liable for and its assets were transferred to a receivership in Eläke-Kansa.

On 1 January 1997, the receivership transferred the TEL insurance portfolio under a contract to five pension insurance companies. As a result of the transfer, the companies that the insurance portfolio was transferred to generated receivables.

The receivables were divided into receivables from Eläke-Kansa’s receivership and receivables from pension providers’ joint liability. The joint liability receivables were collected as part of the TEL-LEL-TaEL insurance contributions in 1997-2003. All TEL-LEL-TaEL pension providers participated in the costs. Each year, the Finnish Centre for Pensions allocated the joint liability between the pension providers.

A final, separate clearing of the amortizing of the joint receivables resulting from the bankruptcy of Eläke-Kansa was made in 2004. The estimated remaining portfolio transfer receivables, both the joint liability receivables and the receivables from the receivership, were collected in 2005 from TEL-LEL-TaEL pension providers and credited to the five pension insurance companies that the insurance portfolio was transferred to.

As of 2006, the realised assets of Eläke-Kansa’s special receivership have been allocated to all TyEL-(TEL-LEL-TaEL) pension providers to be used in pension expenditure that the TYEL-pension providers are jointly responsible.