FINLAND - The International Monetary Fund (IMF) has warned Finland it needs to improve pension fund management if it is to cope with a rapidly ageing population.
In the concluding statement from its recent mission to the country, the IMF claimed "Finnish pension funds appear in good financial health, but reforms may be required to cope with changing demographics".
The report noted although the industry has "suffered significant losses during 2008", the solvency levels of the pension funds "remained well above the minimum" and even though the Finnish government is now proposing the introduction of temporary solvency rules that will give schemes more flexibility. (See earlier IPE articles: Finnish funds prepare for relaxed solvency rules and Ilmarinen falls 9.4% as Finland acts on pensions solvency)
The IMF suggested recent structural changes to the Finnish pension system - such as higher pre-funding, linking benefits to life expectancy, and encouraging later retirements - "have all made the system more resilient".
It claimed although "fundamentally" Finland operates a defined benefit (DB) pension system, it now "embeds considerable risk-sharing by the employees in terms of future benefit reduction or contribution increases".
As a result, the IMF stated, "merits of raising gradually funding levels and introducing a defined-contribution component option, while preserving an adequate safety net, could be considered" for the future.
The organisation suggested if Finland combined these changes with the EU "prudent-person rule", "these steps could raise long-term returns" that could then help maintain fiscal sustainability.
However the report from the IMF also suggested Finland should look at alternative pension reforms such as:
The IMF noted Finnish financial markets and banks have been "remarkably resilient to the global turmoil so far", but warned the 'spillovers' from the crisis would take a "severe toll" on Finland's growth in 2009.
It said "looking forward, rapid population ageing and slowing productivity threaten longer-term growth, competitiveness and fiscal sustainability", and as a result the IMF claimed "continued steps are required to maintain financial stability, consolidate fiscal resilience to population aging, and stimulate labor force participation and productivity" to ensure the preservation of Finland's existing social model.
Finnish pension provision mainly consists of the residence-based national pension and employment-based earnings related pensions run by pension insurance companies, company pension funds and industry-wide pension funds in the private sector, while public sector schemes are handled by their own authorised pension providers.
The recent reforms to the system - which came into effect in 2007 - included the introduction of a flexible retirement age between 63 and 68, and the abolition of unemployment and individual early retirement pensions.
The legislation also merged three previous private-sector pension acts into one Employees Pension Act (TyEL), although the self-employed, farmers, seamen and public sector workers still have their own pension acts, which offer pension provision that "more or less corresponds" to the TyEL.
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