Fund transfer obligation
Pensions according to the Employees Pensions Act (TyEL) and the Seafarer’s Pensions Act (MEL) are financed partly using a funding technique. The pension share funded in advance forms an actuarially calculated pension liability for the pension provider that has funded the contribution, in other words, a technical provision. The pension provider covers the technical provision with its investment assets. The pension providers prepare for investment risks with their solvency margin. Due to the funding in advance, pension assets have accumulated in the earnings-related pension scheme. The investment profit of these assets impacts the future earnings-related pension contribution level.
As of 2007, a collective equity-linked buffer fund has been included in the technical provisions of TyEL providers and the Seafarer’s Pension Fund. This collective buffer fund makes it possible for pension providers to make riskier investments, thereby achieving greater profit expectations. In the long-term, improved investment profits will dampen the need to raise the insurance contribution.
The fund transfer obligation determines how each pension provider insuring under TyEL and MEL should annually compensate the funds. The fund transfer obligation consists of three components:
- the supplementary coefficient
- the equity-linked factor, and
- the discount rate.
The discount rate (3%) is the technical interest used when calculating the capital value of the pension.
Along with the Seafarer’s Pension Fund, each TyEL provider is obligated to annually
- refund old-age, disability and unemployment pension funds to the amount of the discount rate
- support old-age pension liabilities to the rate of return on old-age, disability and unemployment liability which corresponds to the supplementary coefficient, and
- transfer to the collective equity-linked buffer fund the share of the amount of the old-age, disability, unemployment and equalization liability that corresponds to 10 per cent of the equity-linked factor.
The TyEL providers and the Seafarer’s Pension Fund confirm their old-age pension liabilities annually by the return rate on old-age, disability and unemployment pension liabilities corresponding to the supplementary coefficient. The supplement is targeted at the old-age pension liabilities of persons who have turned 55 years of age.
The supplementary coefficient is determined on the basis of the pension providers’ average solvency and constitutes 18 per cent of the average solvency of the pension provision under TyEL and MEL, calculated under certain restrictions, weighted by pension liabilities and reduced by the discount rate.
The value of the supplementary coefficient is calculated by the Finnish Centre for Pensions every quarter year based on solvency data received from the pension providers. When the value changes, confirmation for the new value is sought from the Ministry of Social Affairs and Health.
The TyEL providers and the Seafarer’s Pension Fund have an obligation to transfer to a collective equity-linked buffer fund. The transfer is made annually. The transferred amount is the share of the old-age, disability, unemployment and equalization liability amount that corresponds to 10 per cent of the equity-linked factor.
The equity-linked factor is determined on the basis of the weighted average return on the pension providers’ and the Seafarer’s Pension Fund’s investments in quoted shares. The equity-linked factor is calculated quarterly by the Finnish Centre for Pensions, based on realized equity profit data provided by the pension providers.