The key labour market organisations reached an agreement on a pension reform in January 2025, following a mandate from the Finnish Government. The reform pertains to the investment and financing regulations of the private sector’s Employees Pensions Act (TyEL) scheme. In addition, it alters the indexation of all earnings-related pensions.

The new calculation report published today by the Finnish Centre for Pensions evaluates the long-term effects of the reform, up to the year 2090.

Four stochastic calculations with thousands of scenarios

The Finnish Centre for Pensions’ calculation report examines the impacts of the pension reform through four distinct calculations.

In each scenario, investment returns, inflation, and wage development are modelled using stochastic modelling. This means that the calculations consider thousands of possible future scenarios, each generated according to specific rules. Presenting several alternative calculations highlights that there is no single correct way to model these phenomena.

The calculations have been conducted using the Finnish Centre for Pensions’ long-term projections model (LTP), which has been developed to simulate the funding of the entire earnings-related pension system over several decades. The baseline scenario’s stochastic projections are derived from 5,000 scenarios generated using the Finnish Centre for Pensions’ Feeniks investment return model.

This stochastic baseline calculation has also been conducted on an institution-specific basis using the Finnish Centre for Pensions’ short-term model, which allows for an assessment of pension institutions’ solvency ratio, equity weighting, bankruptcy risk and returns.

In addition, the report contains three alternative calculations evaluating the effects of the pension reform. The first alternative combines investment returns from the Feeniks model with a stochastic population forecast, while the second uses Statistics Finland’s 2024 population projection.

The third alternative calculation utilises the investment return model developed by Ortec Finance. This model is widely used by pension providers in various countries and can generate similar scenarios to those produced by the Finnish Centre for Pensions’ Feeniks model.

Effects of pension reform depend on various factors

The Finnish Centre for Pensions has developed and diversified its projection models to enable a more comprehensive assessment of the reform’s impacts, particularly regarding uncertainties in investment markets and demographic developments.

Furthermore, these new models provide improved tools for evaluating the consequences of the pension reform for pension insurers.

Different models can be used to test how the results change as the underlying assumptions are altered. This approach provides an overall picture of the reform’s effects under varying economic and demographic conditions.

The findings suggest that the reform increases the volatility of the TyEL pension contribution, but over the long term, the expected return rises. At the same time, the average level of the pension contribution is expected to decrease. The pension reform also includes an index restriction that affects current earnings-related pension benefits. This restriction limits the growth of the earnings-related pension index if wage levels increase more slowly than prices. According to calculations by the Finnish Centre for Pensions, the impact of the index restriction on pensions is minor.