Collective Occupational Pension Provision Arranged by Employer
Employers in Finland may arrange occupational pension provision for their employees through either a group or an individual pension insurance.
The group pension insurance is collective and requires that the persons covered by the group pension insurance are selected objectively on the basis of, for example, their job tasks or occupational status. If the intention is to target the occupational pension insurance at a specific person, the employer has to take out individual pension insurance for the employee in question.
Registered group pension insurance
The group pensions arranged by a private employer for its employees can be registered or free-form. In the early days of the statutory earnings-related pension scheme, a private employment contract often came with a registered occupational pension. Otherwise the pension provision level was low.
Registered occupational pensions schemes were closed from the beginning of 2001. No new occupational pension insurance policies could be registered after that time. Those already covered by such a policy maintain their entitlement to the occupational pension.
Taking out registered occupational pension insurance was voluntary, but the content and activities of such policies were subject to certain restrictions stipulated by law. For instance, this type of insurance is linked to the index of the earnings-related pension acts.
In addition to old-age pension, a registered occupational pension may include a disability and an unemployment pension. A supplementary survivors’ pension and a burial grant may be part of the old-age pension insurance. Alternatively, the occupational pension may consist of only these two. The employee retains the right to the accrued occupational pension automatically, also when the employment contract ends.
Under certain circumstances, due to the transfer regulations of the 2005 pension reform, it is possible to receive a statutory basic pension prior to the age of 62 if the retirement age of the registered occupational pension is lower than that.
The self-employed have also been able to take out a registered occupational pension insurance. In that case, it was enough for the self-employed alone to be the target of such a supplementary provision.
Continuing registered occupational pension insurance no longer exist for self-employed. Nevertheless, based on terminated insurance policies, retiring self-employed persons may still receive occupational pensions.
The registered occupational pension provision is arranged by authorised pension providers.
The following concerns only free-form group pension insurance.
Free-form group pension insurance
In practice, group pension provision currently arranged by employers is free-form collective occupational pension insurance. In terms of content, it may be similar or different from registered occupational pension provision.
Taking out insurance is voluntary, and in terms of their contents, the insurance policies may be drawn up fairly freely. In general, free-form group pension insurance includes only old-age pension, but disability and survivors’ pensions may also be incorporated in the pension provision.
Usually, free-form group pension insurance policies include vested rights, i.e. the right to the accrued occupational pension even after the employment contract has ended. The entitlement to a vested pension may be dependent on, for instance, the length of the employment contract. It may also be partial, e.g. 50 per cent of the accrued supplementary pension.
However, the right to a vested pension may not exist, in which case the employee loses his occupational pension benefit when changing jobs or in case he is fired.
Administration and supervision of group pensions
Group pension insurance may be arranged as an occupational pension with an industry-wide or a company pension fund that handles either both the statutory and the voluntary or only the voluntary pension provision. Life insurance companies also offer collective occupational pensions.
Voluntary group pension insurance may also be based on the company’s own pension regulation. However, in that case it is not an insurance policy but a book reserve, where the employer is committed to paying pensions to a defined group of persons.
The Insurance Supervisory Authority supervises pension providers and funds in the insurance industry in Finland.
Structure of group pensions
The prerequisite for group pension insurance is that it concerns a collective group of people which includes at least two people. The group may not be made up of only one person (e.g. the managing director), except in cases where a group which originally consisted of several persons shrinks to include only one person.
The insured group may be defined on the basis of, for example, a division based on the employee’s occupational status, profession, line of industry, establishment, date of commencement of employment, time of birth, other pension provision arranged by the employer or transfer of activities.
The occupational pension paid from the group pension insurance is typically either a complementing occupational pension paid in euros or a pension with the intention to lower the retirement age. The insurance may also be a combination of these benefits.
The tightening taxation measures of voluntary supplementary pensions as of the beginning of 2013 also apply to group pensions. If the employee pays part of the insurance contributions, the contributions are tax deductible only if the pension begins at age 68 at the earliest. If the employer pays the full contribution of the collective supplementary pension, the pension’s age of commencement may be lower than that. In group pension insurance, the lowest possible retirement age which entitles to tax deductions for the contributions is 55 years. If the employee pays part of the contributions, the age limit is 60 years.
The Income Tax Act does not stipulate the lowest possible old-age retirement age if the employer pays the contribution in full. The lowest age limit of 55 years and a maximum pension of 66 per cent of the regular earnings, as defined for registerable supplementary benefits approved by the Board of Directors of the Finnish Centre for Pensions, has been used. As the pension regulations have changed, these bases are not referred to in the tax legislation. Nevertheless, the aim is not to change the retirement age for old-age pension.
Group pension insurance may be built up in several ways. If the insurance policy involves a lower retirement age, it has been possible to retire early on a statutory old-age pension early (at age 62 at the earliest) and the occupational pension can be used to compensate for the reduction in income.
Under certain circumstances, due to the transfer regulations of the 2005 pension reform, it has been possible to receive a statutory basic pension prior to the age of 62 if the retirement age of the free-form occupational pension was lower than that.
If the lower retirement age is below the retirement age for statutory old-age pension, the income during the retirement years without a statutory pension are in their entirety financed through the occupational pension.
Determining the pension benefits
The group pension insurance may be a defined-benefit or defined-contribution insurance. In a defined-benefit arrangement, a certain benefit level has been determined for the employee, e.g. an old-age pension of 66 per cent of the wage at the agreed retirement age.
In a defined-contribution scheme, only the contribution level is defined, and the occupational pension that will be paid is determined on the basis of the accumulated savings. For example, the contribution may be defined as a fixed percentage of the employee’s wage or be linked to the company’s profits.
Nowadays, almost all new group pensions are defined-benefit schemes. However, the share of defined-contribution contracts in the insurance portfolio is only a couple of per cent since such insurance policies have been taken out only in recent years. Former defined-benefit arrangements have also been converted to defined-contribution arrangements.
The annual index security for occupational pensions in payment can be arranged in very many different ways but, in general, occupational pensions are adjusted with either the earnings-related pension index or based on customer bonuses and rebates paid by life insurance companies.
Financing and taxation
Group pension insurance contributions in their entirety are deductible expenses for the company. In contracts to private pension insurance, the annual pension contributions have no maximum amount, as long as the purchased occupation pension provision is at a reasonable level according to the tax authorities.
Group pension insurance contributions are not considered income for the employee, and thus the employer does not have to withhold preliminary taxes on them, nor pay social insurance contributions. The occupational pension paid to the pension recipient in due course is taxed as earnings.
The employee may pay part of the pension contributions. At the most, the contribution may amount to half of the annual contribution.
If the insured pays part of the contribution, he may deduct the contributions which he has paid in the income taxation to a maximum of five per cent of the wage that the employer in question has paid to him. In euros, the deduction may amount to EUR 5,000/year at the most.
At the moment, every fourth recipient of a private-sector earnings-related pension receives an occupational pension. However, considered in euros, the significance of occupational pension provision is slight. Group pensions make up less than four per cent of pensions paid.