Financing technique per pension benefit for private sector employee pensions

Each pension paid under the Employees Pensions Act (TyEL) or the Seafarer’s Pensions Act (MEL) is divided into a funded and a pay-as-you-go component through a cost allocation carried out by the Finnish Centre for Pensions. The division is carried out per pension benefit, since the pension provider responsible for the funded share of the pension is the provider that has insured the employee’s work, whereas the non-funded share, or the pooled component of the pension, is the joint responsibility of all pension providers.

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

The costs of pension components accrued from unsalaried periods are distributed between private and public sector pension providers in relation to the insured wage sums.

Pensions of the self-employed and farmers 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 also participates in the costs of sailors’ pensions.

Old-age 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 funded component of pensions are increased with an 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.

Disability pensions

Pension providers do not fund disability pensions in advance each year. When a disability pension starts, the pension provider reserves an actuarilly calculated item for the payment of the pension until the recipient reaches their retirement age. The part that exceeds the component that is funded in advance is financed according to the principles of the PAYG system.

Slightly more than half of the amounts paid in disability pensions under the Employees Pensions Act and the Seafarer’s Pensions Act are funded.