Employer arranges collective occupational pensions

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 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.

Free-form group pension insurance

In practice, the group pensions arranged by private employers for their employees are free-form occupational pensions. As a rule, free-form group pension insurance includes only old-age pension, but disability and survivors’ pensions may also be incorporated in the pension provision.

As a rule, free-form group pension insurance policies include vested rights, that is, 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, for example, 50 per cent of the accrued occupational pension. If there is no right to a vested pension, the employee loses their occupational pension benefit when they change employer or are fired.

Administration and supervision of group pensions

Group pension insurance may be arranged with an industry-wide or a company pension fund or a life insurance company. Voluntary group pension insurance may also be based on the company’s own pension regulation. 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 Financial Supervisory Authority supervises pension providers and funds in the insurance industry in Finland.

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Structure of group pensions

Group pension insurance must cover a collective group of people which includes at least two people. The insured group can be defined on the basis of, for example, the employee’s occupational status, profession, line of industry, establishment, date that the employment began, 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 supplemental occupational pension paid out to the employees or a pension with the intention to lower the employees’ retirement age. The insurance may also be a combination of the two.

The retirement age of occupational pensions is the same as the age at which the age group’s insurance obligation ends.

Year of birth Age when insurance obligation ends
1957 or earlier 68 years
1958-1961 69 years
1962- 70 years

The same age limits apply to collective occupational pensions if the employer pays part of the insurance contributions. If the employer pays the total contribution, the retirement age may be lower.

In group pension insurance policies, the lowest possible retirement age that entitled to tax deductions of the contributions used to be 55 years. If the employer paid part of the contributions, the retirement age used to be 60 years.

Under certain circumstances, due to the transition regulations of the 2005 and 2017 pension reforms, it has been possible to get a statutory basic pension before the statutory retirement age if the retirement age of the free-form occupational pension was lower than that. The pension is reduced for early retirement. 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 may be a defined-benefit or a defined-contribution pension. In a defined-benefit arrangement, a certain benefit level has been determined for the employee, for example, an old-age pension that is 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-contribution schemes. 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, as a rule, 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 contrast 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 for them. The occupational pension paid in due course to the pension recipient 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, they may deduct the contributions they have paid in their 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 5,000 euros per year at the most.

Registered group life insurance

Registered group life insurance policies under the Employees’ Pensions Act (TEL) arranged by the employer ended on 31 December 2016. At the same time, the obligation to pay contributions ended and pension no longer accrued.

Before the year 2001, group life insurance policies arranged by private employers for their employees were either registered or free-form policies. In the early days of the statutory earnings-related pension scheme, private employment relationships often came with a registered occupational pension since the coverage would have been very low otherwise.

Registered occupational pension schemes were closed as of the beginning of 2001. It has not been possible to register new occupational pensions since then. Those who were already covered by the scheme retained their right to the occupational pension and to a continued insurance.

Abolishing the occupational scheme under TEL does not affect pensions in payment or the amount of occupational pension that an employee had earned before the scheme was abolished.

Taking out a registered occupational pension has been optional, but the content and operations of the schemes have been regulated by law. For example, they are linked to the indexation of the earnings-related pension schemes.

If the registered occupational pension scheme includes an old-age pension, it also includes a disability pensions.  A supplementary survivors’ pension and a funeral grant may be included in the old-age pension or, alternatively, the occupational pension may include only these two benefits. The employee automatically retains the right to the earned occupational pension when the employment relationship ends.

Due to the transition rules in relation to the 2005 and 2017 pension reforms, and under certain conditions, it is possible to get an early statutory basic pension before one’s retirement age if the registered occupational pension comes with a lower retirement age.

Self-employed persons have also been able to take out a registered occupational pension. The self-employed has then been the sole beneficiary of such a supplementary benefit. There are no continuing registered occupational pensions anymore. Based on insurance policies that have ended, a self-employed person who retires can be granted an occupational pension.

Registered occupational pensions are administered by earnings-related pension insurance companies.

Coverage

At the moment, nearly every fourth person who gets a private sector earnings-related pension gets an occupational pension (either free-form or registered occupational pension). The occupational pensions are very small, though. Group pensions make up less than four per cent of pensions paid.