The report recognizes three trends in paradigmatic pension reforms:  

1. Structural changes in earnings-related pension systems – from defined benefit (DB) to defined-contribution (DC) systems.  

2. Growing importance of supplementary pensions – the role of occupational and individual supplementary pensions has expanded. 

3. Increased individual choice – individual pension saving and flexible use of pension capital and flexible retirement timing have become more common. 

Senior researcher Kati Kuitto from the Finnish Centre for Pensions, looking at the bigger picture, what types of pension reforms have been implemented globally over the past few decades? 

Overall, the reforms have been either paradigmatic (that is, structural), altering the basic architecture of the system, or parametric (that is, incremental), refining specific rules and conditions.  

The reforms have progressed in waves. The 1990s were characterised by privatisation and funding initiatives. The 2000s saw mainly parametric changes that strengthened financial sustainability. Since the end of the 2010s, measures have focused increasingly on benefit adequacy and social sustainability.  

Institutional path dependencies, as well as political and economic circumstances have influenced the types of reforms ultimately implemented in different countries.   

In many countries, structural reforms have led pension systems towards defined contribution models. What does this mean? 

As concerns have arisen over the financial sustainability of DB pension systems, there has been a shift towards DC models. In DC models, the contribution level is fixed and the benefit level is determined based on contributions made and the investment returns achieved. This stands in contrast to DB systems, where the benefit level has been predetermined.  

There has been a significant shift from DB- to DC-based models, particularly within occupational pensions and other supplementary systems that enhance statutory pensions. For example, the Netherlands is currently undergoing a reform that will see its occupational pension system become DC-based by 2027. 

DC models are less common in statutory earnings-related pension systems. Where they do exist, such as in Italy, Sweden, Latvia and Poland, they are typically implemented as notional defined contribution accounts (NDC). The model is not based on the accumulation of investment funds; instead, pension benefits are calculated based on the total contributions made over an individual’s entire career, and a notional rate of return.  

As in DC systems, the financial risks in many DB systems have been shared between current and future pension recipients by introducing several automatic stabilisation mechanisms.  

For example, in Germany, Sweden and Canada, these automatic stabilisation mechanisms adjust pension benefits and contributions in response to economic and demographic changes. In Finland, the life expectancy coefficient and linking the retirement age to life expectancy limit the growth of pension expenditure due to rising longevity. 

The second trend you identified concerns the expanding role of supplementary pensions. What is this about? 

As populations age and statutory pension systems come under increasing fiscal pressure, many countries have introduced supplementary pension systems to help ensure that overall retirement income remains adequate.   

Efforts to boost the uptake of supplementary pensions among employees have included introducing statutory obligations, automatic enrolment and, for example, a favourable taxation of supplementary pensions.  

Automatic supplementary pension enrolment is currently the most prominent and rapidly growing means of expanding the coverage of supplementary pensions. Under this system, employees are enrolled in a supplementary pension system by default unless they actively choose to opt out. This approach has notably broadened coverage, particularly in countries where statutory pension levels are low or where individuals have historically been less engaged in private pension saving. 

The third trend is the increased individual choice within pension systems. Liaison manager Mika Vidlund from the Finnish Centre for Pensions, what effects do these flexibilities have? 

Greater freedom of choice provides individuals with more flexibility and the ability to influence one’s future income. At the same time, it shifts responsibility and risk from the pension system to the individual, which may undermine the adequacy of retirement income in later life.  

Pension funds based on individual accounts have increased opportunities for individuals to make their own investment choices and determine their risk profile, but experiences have varied. In Sweden, the system initially faced challenges regarding public trust, but it has since become an established part of the statutory pension provision, with enhanced regulation, improved risk management, and a growing role for the default fund.   

In Central and Eastern European EU countries, pension funds were originally designed to be part of the earnings-related pension system but have now been made voluntary in many countries.  

Considerable flexibility in how pension savings can be accessed    

It has become increasingly common for individuals to withdraw their pension capital either as a lump sum or in fixed-term annuities. This increases flexibility, but it also raises the risk of depleting savings prematurely. As a result, most countries have increased guidance and sought to steer the use of pension capital through taxation.  

There is considerable variation in global practices. At the extremes are the United Kingdom and Estonia, where it is possible to withdraw one’s entire pension capital as a lump sum even before reaching retirement age. In most other countries, however, lump-sum withdrawals are permitted only under certain conditions or are limited to a portion of the pension savings.  

Flexibility in retirement transitions increasingly common in OECD countries 

Flexibility regarding the timing of retirement has increased, as systems are being reformed to reflect longer life expectancy and more varied career paths. This flexibility is primarily evident in two ways: the freedom to choose when to retire and the option to combine work with receiving a pension.  

In many countries, the retirement age is defined as a range within which individuals may choose to retire. The amount of pension received depends on the time of retirement. In many countries, the retirement age is also linked to changes in life expectancy.   

The option to combine work and pension has become more common, particularly through partial old-age pensions, although the terms and conditions for this vary considerably from one country to another.  In Finland, the partial early old-age pension allows individuals to access part of their pension capital before their retirement age while continuing to work. Taxation and financial incentives play a key role in influencing these choices.  

How do pension reforms in Finland compare internationally? 

In Finland, the reforms have mainly been incremental, targeting individual rules: introducing automated stabilising mechanisms, flexible retirement ages, and the partial old-age pension, which has become increasingly common. 

Supplementary pensions have not developed in the same way as elsewhere. Since nearly all working-age individuals in Finland are covered by statutory earnings-related pensions and there is no cap on insurable earnings, supplementary pensions have not played a significant role in the country’s overall pension provision. The European Commission’s initiatives to enhance supplementary pension systems may, however, spark further dialogue on this matter in Finland. 

Publication: Paradigmatic Pension Reforms in International Comparison