Why does the earnings-related pension scheme need to be reformed again?
The financial sustainability of the earnings-related pension scheme is being tested by a decrease in birth rate, a declining dependency ratio and weak economic growth. The earnings-related pension scheme must evolve whenever the operating environment changes.
The pension negotiations are based on the Government Programme’s objective that, by the end of January 2025, the necessary changes to the earnings-related pension scheme will be examined to ensure financial sustainability and an adequate level of security.
The changes must strengthen public finances in the long term by approximately 0.4 percentage points relative to GDP, which corresponds to approximately EUR 1 billion. In addition, ways must be found to stabilise the level of earnings-related pension contributions in the long term in order for the earnings-related pension scheme to adapt to possible shocks. The Government Programme also contains entries concerning disability pensions and other pension schemes.
Who is involved in the negotiations?
Preparations for the pension reform are being carried out by two working groups: the negotiating group of the social partners for pensions and a tripartite working group set up by the ministries.
Akava’s Senior Advisor Katri Ojala and Labour Market Economist Eugen Koev are involved in the negotiating group of the social partners for pensions. The group consults experts from, for example, the Ministry of Social Affairs and Health, the Ministry of Finance, the Finnish Centre for Pensions (ETK) and the earnings-related pension sector.
The tripartite working group set up by the ministries has representatives from the Ministry of Social Affairs and Health, the Ministry of Finance, social partners and, as an expert member, the Finnish Centre for Economic Development and Development (ETK). Akava is represented by Katri Ojala.
When will the negotiations take place and how will they proceed upon the completion of the work of the working groups?
The preparations of both working groups are expected to be completed by the end of January 2025. If the social partners can agree on the content of the reform, the Ministry of Finance and the Finnish Centre for Economic Development and Development (ETK) will assess, in a tripartite working group, whether it meets the objectives. The Government then decides whether the implementation of the proposal of the social partners, i.e., the preparation of legislation, will begin within the Ministry of Social Affairs and Health. The Government’s proposal will be discussed in Parliament in due course, after which the changes will be applied in accordance with the necessary transitional periods.
If the social partners do not reach an agreement, the Government will make political decisions regarding further measures.
When was the last time the pension scheme was reformed?
The previous broader pension reform came into force in 2017. The agreement on this reform was concluded in 2014. Minor changes to the earnings-related pension scheme are constantly being made.
In 2017, the retirement age was raised, changes were made to the accumulation of earnings-related pension and two new types of pension were introduced, partial early old-age pension and years-of-service pension. The aim was to encourage longer careers, ensure the sustainability of the financing for earnings-related pensions and take into account the sustainability gap in public finances.
How are earnings-related pensions funded?
Pensions are financed by earnings-related pension insurance contributions and investment income. The funds needed for the payment of earnings-related pensions are mainly collected from earnings-related pension insurance contributions each year. They are paid by employers and employees as well as entrepreneurs. The working generation, therefore, finances the earnings-related pensions of those who are retired.
The Finnish earnings-related pension scheme is partially pre-funded; a portion of the earnings-related pension insurance contributions is constantly transferred to a separate fund. The earnings-related pension companies invest the assets, and the investment income is utilised to finance future earnings-related pensions. The share of the fund may change annually depending on financial circumstances and the level of the earnings-related pension contributions.
How many pension recipients are there in Finland?
In 2023, 33.2% of persons over the age of 16 living in Finland were pension recipients, according to data from the Finnish Centre for Pensions (ETK). This share of the population represents about 1.6 million pension recipients. These figures do not include those who receive survivors’ pension. The proportion of the retired population varies in different areas of Finland. It is highest in South Savo, where 39.3% of the population receive old-age pension.
In 2023, there was an average of 2,292,000 wage-earners and 320,000 entrepreneurs in Finland, according to Statistics Finland’s Labour Force Survey.
What issues will Akava emphasise in the negotiations?
The earnings-related pension system must remain stable and reliable. At Akava, we consider it essential that people can rely on the earnings-related pension system and have time to prepare for possible changes. Intergenerational equality is also important.
Prior to any changes, thorough preparations must be made and a sufficient knowledge base provided to the working groups by expert organisations. The negotiations require a peaceful, undisturbed working environment, so while they are underway, we will not comment on the progress of the work of the working groups or the content of the discussions.
What does longer life mean for the earnings-related pension scheme?
As people are living longer, earnings-related pensions will need to be paid for a longer period of time. The lifespan of Finns has increased in recent decades. In 1990, the life expectancy of a 65-year-old man was less than 14 years, and for a woman of the same age, nearly 18 years. In 2021, the corresponding life expectancy was 18.5 years for a man and 21.9 years for a woman beyond 65 years of age.
Pension reforms that entered into force in 2005 and 2017 took into account the increase in life expectancy by increasing the old-age pension age and introducing a life expectancy coefficient. This limits the increase in the pension expenditure resulting from longer life and encourages people to continue working.
It is important for the sustainability of the earnings-related pension scheme that people can cope with their work and that age discrimination is eliminated from working life.
What perception does the Finnish population have about earnings-related pension security and the earnings-related pension scheme?
According to the 2024 Pension Barometer survey of the Finnish Centre for Pensions, confidence in the earnings-related pension scheme has remained high, with 70% of Finns saying that they trust the earnings-related pension scheme. General knowledge regarding pension security remained unchanged, but people had a greater understanding of the fact that pension can be increased by postponing retirement. An increasing number of people are confident that the earnings-related pension scheme can ensure a reasonable income for current pensioners and that pensions will still be able to be paid in the future.
If there were a need to reinforce the pension funding, respondents viewed an increase in labour immigration as the preferred option, followed closely by an increase in pension contributions and endeavours to improve returns on investment activities by increasing risk-taking. Pension cuts were clearly less favourable.
The Self-employed Persons’ Pensions Act (YEL) was amended in 2023. Will self-employed persons’ pensions be reformed as part of the earnings-related pension negotiations?
The current pension negotiations only concern the earnings-related pension security of employees. The impacts of the change to YEL will be monitored and assessed. However, according to the Government Programme, an assessment of the development needs of the YEL system will be initiated during the Government term.
How does self-employed pension security work?
Self-employed persons pay YEL contributions according to their confirmed income, which also serves as the basis for their social security and pension benefits. YEL income determines the future level of pension security for the self-employed person as well as providing a basis for other earnings-related social security benefits.
Text Ritva Siikamäki, Akava
Useful links
Information on earnings-related pensions
Pension terminology
