Boundary conditions of private sector investments
The implementation of private sector earnings-related pensions has been decentralised to pension insurance companies, company pension funds and industry-wide pension funds. In addition, the Farmers’ Social Insurance Institution handles pension insurance for farmers and grant recipients, while the Seafarer’s Pension Fund handles pension insurance for sailors.
The earnings-related pension scheme is a defined benefit (DB) and partially funded scheme. Part of the future pensions under the private-sector pension acts for employees (Employees Pensions Act and Seafarer’s Pensions Act) are pre-funded while the rest of them are financed through future pension contributions according to the pay-as-you-go (PAYG) principle.
In practice, the partial funding has been realised so that each individual pension is divided into a funded and an unfunded component. The funded components are the responsibility of the pension providers.
The pension liability generates technical provisions for the pension providers, the size of which is determined actuarially. On the basis of joint and several liability in case of bankruptcy, the insured of an individual pension provider do not lose their pension benefits if the pension provider goes bankrupt.
The funding is carried out separately for each pension benefit. The main part of the funding is for old-age pensions, but unemployment and disability pensions are also funded. Survivors’ pensions, years-of-service pensions, partial old-age pensions and part-time pensions, on the other hand, are not funded. The same applies to future index increases.
It lies in the nature of the funding technique that new liabilities occur continuously as pension rights accrue and old technical provisions are dissolved as pensions are paid out.
In pension insurance under the Employees Pensions Act, the employer chooses the pension provider, but the pension benefits are independent of the pension provider. Pension providers may issue client bonuses or rebates on the pension contributions to employers as permitted by the pension providers’ solvency and loading profit.
Private sector solvency regulations are necessary since the pension providers are liable for the funded pension components with their assets. They also engage in mutual competition with investment profits, although the system includes a joint and several liability. That means that the assets and liabilities of a pension provider that goes bankrupt are shared between the others.
The solvency regulations prevent competition with excessive risk-taking since the responsibility of the realisation of large risks is divided among all parties in the system.