The Connection Between Pension Expenditure and Pension Assets and Investment Operations
Pension providers invest the shares funded from earnings-related pension contributions as securely and efficiently as possible, since payment of accrued pension rights must be secured when the time comes. Pension expenditure that is not funded in advance is covered by the pension providers during the year of payment, through accumulated earnings-related pension contributions and state shares.
Successful investment operations with good profit also offers the opportunity to lower the insurance contribution level when the investment profit is transferred to become part of pension financing. For example, a change of one percentage point in the average investment profits has the long-term effect of approximately two percentage points on the TyEL contribution, since the amount of pension assets at the time being is roughly double the wage bill.
There are a lot of risks related to the investments of earnings-related pension providers, usually correlated to how great the profit aim is. The decentralized earnings-related pension scheme also serves to control investment risks.
The investment operations of pension providers in the private sector are tightly regulated, since pension providers have accumulated technical reserves for future pensioners, calculated according to principles of actuarial mathematics. This is due to the funding of insurance contributions. In the public sector, pensions are not funded in advance per individual, complete with technical reserves. Instead, collective buffer funds for future pension expenditure are collected per pension act.
Pension providers of the private sector do not only compete in efficiency but also by providing services for the policyholders and investment profits. For that reason there are system-level conditions and limitations set in place for the investment operations of pension providers and the related risks, as well as to ensure the solvency of the earnings-related pension providers.
Among other things, solvency regulations require the private sector to have a sufficient amount of solvency margin to cover any possible investment losses. The margin between the assets and debts of pension providers must thus be sufficient in order to cover any deficits caused by weak investment periods.
A certain obligation to transfer into funds has also been determined for pension providers with TyEL and MEL activities. This enables investment profit from pension funds to become part of the funding of pensions paid in accordance with these pension acts, and thus also later of the actual pensions paid.
Pension providers cover their fund transfer obligation by their investment profit. If the profit received from investment operations does not meet with the profit requirement for a certain pension provider, the deficit must be leveled from the solvency buffers. On the other hand, if the investments of the pension provider yield more than required by the obligation to transfer into funds, the provider may increase the solvency and take bolder investment risks, since it is also better prepared for investment losses.
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