Different Components of the TyEL Insurance Contribution
The financing of pensions in accordance with TyEL and MEL is carried out using a partly funded technique. This means that each pension is divided in two according to how the pension is financed. Part of the pension has been funded in advance (the funded component) and assets for its payment are taken from the fund, while the remaining share of the pension (the pooled component) is paid for through the insurance contribution of the pension payment year.
The insurance contribution is divided into different parts so that assets accumulated through certain contribution shares are funded for the future pension, while certain parts are paid for using the pension expenditure and management costs of the year in question.
The old-age pension component in the premium income is transferred to the fund for payment of a future old-age pension. The old-age pension share is set at such a level that the premium income it yields will, in time, be sufficient to pay the funded share of the old-age pension that has accumulated during the year in question as old-age pension.
The contribution collected through the disability pension component is used for financing starting disability pensions until the old-age retirement age. The level of this component is set to ensure sufficient assets for covering half of the disability pension expenditure starting during the next two years following the year of payment.
The pooled component of the contribution is used for collecting assets for the jointly paid pooling pension expenditure. The pooling liability that buffers the pooled component should always be covered with at least 20 % of the pooling pension expenditure of the following year. Assets are also collected in the buffer fund of the pooling component in order to balance the increase in the pension insurance contribution during the 2010s and 2020s.
The component titled other consists of management costs, statutory contributions and a contribution loss share. The management costs and contribution losses vary from one employer to another due to, for example, the size of the employer. Statutory contributions include the cost share of the Finnish Centre for Pensions, judicial administration costs and an insurance supervision fee.
The contribution refund is a contribution discount for the employer that depends on the profit of pension providers’ investments as well as the duration of the customer relationship.
Through a temporary discount, the surplus of the buffer fund containing contributions collected for unemployment pensions is returned to the employers.