​Tweaked recipe for Finnish pension contributions to boost costs transparency

A seemingly minor change being made in Finland to the way occupational pension contributions are set could increase competition over administrative costs between the big four providers of private sector workplace pensions – Varma, Ilmarinen, Elo and Veritas.

The four earnings-related pension insurance companies have submitted an application about the calculation basis for the 2023 pension contribution for private sector employees in the TyEL scheme to the Ministry of Social Affairs and Health.

Apart from the main point in the application – that the TyEL contribution for 2023 will remain at the same level as in 2022, and is on average a hardly-changed 24.84% of the wages used as the basis for the contribution – it also includes a legal amendment.

Starting from 1 January 2023, Varma announced there would be new differences between earnings-related pension insurance companies in TyEL contributions.

“In the future, each earnings-related pension insurance company will determine their own TyEL contribution component required for implementing earnings-related pensions and taking care of insurance policies, in other words, a so-called expense loading component, and it will be directly taken into account in the customer’s TyEL contribution,” the mutual pensions insurer said.

Varma’s actuarial director Ritva Tarkiainen told IPE that the administrative cost component – the element each provider will be able to determine separately – is 0.25% of wages on average.

“Until now, the TyEL contribution and the administrative cost component it includes, before client bonuses, have been the same for all private-sector employers regardless of their earnings-related pension insurance company,” she said.

“The most cost-efficient pension insurance companies have returned the savings in administrative costs as part of the following year’s client bonuses.

“From now on each pension company will predetermine the administrative cost component, that is part of the TyEL contribution, directly to correspond as closely as possible to its actual operating costs,” said Tarkiainen.

“I would hope that the change would be easier for customers from the point of view of transparency and comparability than it seems now,” she said.

At Ilmarinen, chief actuary Barbara D’Ambrogi-Ola said she believed the change was good.

“The idea with this change is to increase transparency and encourage the companies to operate more efficiency without a lack of quality in the provided services,” she told IPE.

“In this way, for the first time in the history of the Finnish earning-related pension system, clients can see the effective administrative costs.

“For the first time in the history of the Finnish earning-related pension system, clients can see the effective administrative costs”

Barbara D’Ambrogi-Ola, chief actuary at Ilmarinen

“On the other hand, this change encourages providers to increase their own efficiency without decreasing the service quality in order to remain appetising for clients,” she said.

But it was not the first time earnings-related pension insurance companies would able to determine the cost of one element of the TyEL contribution, she explained.

“In fact, from the year 2018 each pension insurance company has been dividing the client bonus following their own rules that have been approved by the Minister of Social Affairs and Health, she said.

However, from January, the same option would now be available regarding the cost of administration, she said.

In principle, D’Ambrogi-Ola said, the change was significant.

“From the point of view of the pension system, this means that companies will try in the future to diminish expenses and increase investment returns more than competitors.

“Both of these intents will contribute to diminishing the TyEL contribution without changing the contribution that is used to pay actual and future pensions,” she said, adding that this was a positive development both for employers and employees.

The Ministry of Social Affairs and Health is expected to confirm the earnings-related pension insurance contribution in mid-November.

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