Earnings-related Pension Indexes

When determining the starting earnings-related pension, the earnings and income from work of the insured are adjusted with the wage coefficient to the level of the first year of pension.

All earnings-related pensions in payment are adjusted annually at the beginning of January with the earnings-related pension index.

Earnings-related pension index

The index adjustment amount is affected by the changes in the consumer price and income level index  calculated by Statistics Finland. In the earnings-related pension index, the share of change in price level is 80 per cent and the share of wage-earners’ income level is 20 percent.

 A simplified example: If the change in income level is 3.5 per cent and the change in consumer price level is 2 per cent:

  • Change in earnings-related pension index = 0,8 x 2 + 0,2 x 3,5 = 2,3 %
  • Change in wage coefficient = 0,2 x 2 + 0,8 x 3,5 = 3,2 %

In practice, this means that the adjustment according to the earnings-related pension index compensates the change in price level and also improves the purchasing power of the pension with the amount that is 20 per cent of the increase of the index of wage and salary earnings that exceeds the consumer price index increase, i.e. of the relative change of the wage-earners’ real income level.

The increase in the purchasing power of the pension is thus higher the more vivid the real increase of the income level is. At the same time, pensions adjusted with the earnings-related pension index will lag behind the average income level development, the more so the faster the real income level develops.

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A calculatory example, when the real change of the income level is 1.75 per cent per year.

The wage coefficient is the index of the active employment period

In the wage coefficient, the share of change in price level is 20 per cent and the share of wage-earners’ income level is 80 percent. In addition to the change in price level, the wage coefficient thus compensates 80 per cent of the real change in wage-earners’ income level.

In addition to the adjustment of wages and earned income, monetary amounts are linked to the development of the wage coefficient prescribed in the earnings-related pension acts. These monetary amounts regulate, among other things, issues concerning the insurance obligation, falling subject to pension acts, and the entitlement to projected pensionable service.

The pension indexes are always based on an already realised price and earnings level development since the index calculation is made using the figures of the third quarter of the calendar year preceding the year of adjustment. For example, the 2011 pension indexes are based on changes in price and earnings level from Q3 in 2009 to Q3 in 2010.

The index point figure of the earnings-related pension index and the wage coefficient are also affected, to a slight degree, by changes in the employees’ (under the age of 53) earnings-related pension contribution. For example, if the earnings-related pension contribution increases by 0.2 percentage points, the change in the  earnings-related pension index will be reduced by 0.04 and in the wage coefficient by 0.16 per cent.

The Ministry of Social Affairs and Health issues a statute of the index point figures of the earnings-related pension index and the wage coefficient by the end of October each year, that is, two months prior to the pension adjustment made at the turn of the year.

The earnings-related pension index and the wage coefficient are enacted in the Employees Pensions Act (Sections 96-100 of the Employees Pensions Act).

National pension index

The national pension index follows the cost-of-living index, calculated by Statistics Finland (1951 October = 100), the index point figures of which are determined for the base year on the basis of the most recent consumer price index.

The adjustment according to the national pension index at the beginning of the calendar year is as large as the annual adjustment of the cost-of-living index in the third quarter of the previous year.

The index point figure for the national pension index is calculated and confirmed by the Social Insurance Institution of Finland.

In addition to index adjustments, national pensions have been subject to level adjustments on a regular basis as a result of a parliamentary decision. In the 2000s, increases to national pension levels were made in 2001, 2005, 2006 and 2008.

Further information

How is an index adjustment done?

Case example: adjustment of earnings-related pension in payment

The retiree’s earnings-related pension amounted to EUR 1,400 per month when the pension began in 2007. The table contains the calculation formulas for determining the pension in 2008-2010. The index adjustment is made to the amount of pension in payment in the previous year.

 

 Year

Earnings-related

pension index

Earnings-related

pension, EUR/month

Calculation formula
 2007  2127  1,400.00
 2008  2178  1,433.57  2178/2127 x 1.400 = 1,433.57
 2009  2286  1,504.66  2286/2178 x 1,433.57 = 1,504.66
 2010  2292  1,508.61  2292/2286 x 1,504.66 = 1,508.61

Case example of adjustment of earnings while working

In the example, the annual earnings of an employee, whose employment began in 1998, have been adjusted to the 2010 level, the beginning year of the pension. The adjustment has to be made in two phases since, until 2004, the TEL 50-50 index was used, and after that, the wage coefficient was used as the index for earnings while working. The index adjustment is made directly from the level of the year in which the wage is earned to the level of the year in which the pension will begin.

Year

TEL 50-50

index

Wage

coefficient

Received

wage €/yr

Index- adjusted

wage

Calculation

formula

 1998  1825  16,000.00  23,214.30

2151/1825 x

1.231/1.000 x

16,000.00

 1999  1868  23,512.50  33,328.86

2151/1868 x

1.231/1.000 x

23,512.50

 2000  1903  24,570.56  34,188.08

2151/1903 x

1.231/1.000 x

24,570.56

 2001  1981  25,676.24  34,319.85

2151/1981 x

1.231/1.000 x

25,676.24

 2002  2054  26,831.67  34,589.61

2151/2103 x

1.231/1.000 x

28,039.09

2003  2103  28,795.12  35,303.94

2151/2054 x

1.231/1.000 x

26,831.68

 2004  2151  1.000  27,142.16  33,412.00

1.231/1.000 x

27,142.16

 2005  1.028  27,956.42  33,477.00

1.231/1.028 x

27,956.42

 2006  1.063  28,795.12  33,345.99

1.231/1.063 x

28,795.12

 2007  1.100  29,658.97  33,191.08

1.231/1.100 x

29,658.97

 

2008

 1.124  30,548.74  33,456.85

1.231/1.124 x

30,548.74

 

2009

 1.192  31,465.20  32,494.68

1.231/1.192 x

31,465.20

 

2010

 1.231  32,409.16  32,409.16

1.231/1.231 x

32,409.16