Finland wants a pension system that is more competitive - but not too competitive. That is basically the message from a succession of government-appointed committees that have looked at ways of improving the country’s pension system.
There are currently nine types of scheme, based on the template created by the Employees Pensions Act (TEL) of 1962. Six are in the private sector and three in the public sector. Simplifying the system is a government priority. Merging the schemes has been ruled out. However, Kari Puro, CEO of Ilmarinen, and chairman of the government’s tripartite working group on pension reform, has said that he would like to see all pensions based on average career salary.
The DB system is well entrenched. A two-man committee appointed by the Ministry of Social Affaiars and Health, which reported last year, considered and rejected any move towards a more competitive, defined contribution (DC) system.
The competitive element has been provided by de-centralising the collection of contributions to various privately managed pension institutions - currently six pension insurance companies (Varma-Sampo, Ilmarinen, Tapiola, Pension, Fennia Pension, Pension-Verdandi and Pension-Alandia) eight industry-wide pension funds and 40 company pension funds.
Until recently, these insurers’ returns have been healthy. Pension insurers have a long-term investment strategy of progressively increasing their exposure to equities, and growing equity markets have ensured large unrealised gains. However, last year the Helsinki stock exchange’s HEX portfolio index fell 25%.
The impact on pension insurers has been severe. Pension-Fennia’s equities portfolio, for example, which accounted for 24.6% of investments, produced a negative return of minus 13.1%. The equities performance dragged total investment income down to 1% of capital employed. The surplus has also suffered. Although pension insurers’ surplus rose to €1.7bn after the deduction of guaranteed bonuses credited to policyholders, unrealised losses of €1.5bn reduced the real surplus to less than €0.2bn
Meanwhile the market has become highly concentrated. Two pension insurers, Varma Sampo and Ilmarinen now dwarf the competition with almost three-quarters of the market in terms of gross premiums written.
Figures from the Federation of Finnish Insurance companies show that at the end of last year Varma Sampo had 39.7% of premiums written while close rival Ilmarinen had 31.7%. Among the other pension insurers , Tapiola Pension had 14.5% , Fennia Pension 9.4 %, Verdandi Pension 4.2% and Pension Alandia 0.3%
There is a certain amount of competition between providers. Annually around 3 % of policies are transferred from one institution to another. This means that, in practice, some 4% of the insured employees are insured in a new pension institution each year. However, the government wants to inject more competition into the system, by giving pension policyholders more freedom to switch from one pension to another in search of better returns.