Financing Technique per Pension Type for Private Sector Employee Pensions

Each pension paid according to the Employees Pensions Act (TyEL) or the Seafarer’s Pension Act (MEL) is divided in two components through the cost allocation carried out by the Finnish Centre for Pensions: the funded component and the pay-as-you-go component. The division is carried out per pension, since the pension provider responsible for the funded share of the pension is the provider that has insured the employment of the individual, whereas the non-funded share, the pooled component of the pension, is the joint responsibility of the pension providers.

Funded pension components can be found in old-age and disability pensions. Survivors’ pensions are not funded in advance, as the pension providers pay for them jointly through contribution shares reserved for the pensions in question and included in the insurance contributions for each year.

The costs of pension components accrued from allowance periods without a wage are distributed between all pension providers in relation to the insured wage sums. Public sector pension providers also take part in these costs.

Pensions of the self-employed and farming entrepreneurs are not funded in advance but paid for with the insurance contributions paid by the self-employed and the farmers, and by State support. The State participates in the costs of sailors’ pensions.

Pension providers fund a sum corresponding to 0.4% of the annual pension accrual for old-age pensions under TyEL and MEL. Additionally, in order to retain the real value of funded pensions, the funding of old-age pensions is supplemented by raising the funded component of pensions with the increment coefficient each year.

Components of  the old-age pension that exceed the funded share are paid for jointly by pension providers as each pension is paid out. The insurance contribution contains a funded component and a pooled component for old-age pensions. Approximately one fifth of all old-age pensions under TyEL and MEL have been funded in advance.