TELA sharply critical of Finnish pensions reform ‘stabiliser’

Finland’s new right-wing government has given employers and trade unions just over a year to come up with a plan to reform the earnings-related pension system, setting out a controversial key parameter.

In its announcement on Monday, the Minister of Social Security, Sanni Grahn-Laasonen, asked the Ministry of Social Affairs and Health, the Finance Ministry, the Confederation of Finnish Industries, Local Government and County Employers (KT), the Central Organisation of Finnish Trade Unions (SAK), the Finnish Confederation of Professionals (STTK) and the Confederation of Unions for Professional and Managerial Staff in Finland (Akava) to nominate members for a working group to investigate the reform of the occupational pension system – part of the programme of prime minister Petteri Orpo, who came to power in June.

The group – which has until the end of January 2025 to make a reform proposal – will be chaired by Liisa Siika-aho, head of department at the Ministry of Social Affairs and Health with the vice chair to be appointed from the Ministry of Finance.

The government also said the reform – necessary because the financial sustainability of the system has been hit by falling birth rates, a weakening dependency ratio and weak economic growth – would have to include a long-term mechanism for “stabilising” the level of contributions.

“The goal of the working group is to find out the necessary concrete changes to the occupational pension system to ensure financial sustainability and secure a sufficient level of benefits,” the government said in its statement.

Changes should bolster public finances long term by about 0.4 percentage points in relation to Finnish GDP, it said – equivalent to about €1bn.

“In addition, the investigation work must find the means for a long-term concrete stabilisation of the pension insurance premium level, where the occupational pension system adapts to possible shocks with the help of a rule-based stabilisation system,” the government said.

Pensions lobby group TELA responded critically to this key aspect of the planned reform, saying the automatic stabiliser of occupational pensions was a big risk for current and future pensioners.

Suvi-Anne Siimes, TELA’s managing director, said she was satisfied with the scale of the adjustment being proposed.

“The direct savings target given to the pension reform is in itself quite close to the estimates that the Finnish pension providers and the Finnish Centre for Pensions have presented about the funding shortfall of the private sector occupational pension system in the long term,” said Siimes, whose association looks after the interests of insurers providing statutory earnings-related pensions.

Siimes also said it was good that the negotiations remained in the hands of the labour-market parties.

“Alternatively, the financing of pensions could of course be adjusted not only by cuts in pension benefits but also by increasing the pension contribution”

Suvi-Anne Siimes at TELA

However, she said the rule-based stabilisation system mentioned in the objectives of the working group’s mandate was “a big unknown that can at worst harness pension security to make up for deficits in other public finances and shocks faced by the national economy”.

The stabilisation system could come to mean almost anything, she continued.

“In practice, however, it is about cutting occupational pensions in the long term in one way or another,” said Siimes.

Rule-based stabilisers in general around the world are adjustment mechanisms aimed at stabilising pension system financing by means of predetermined rules, she noted adding that such a mechanism could cut the index increases of paid-in occupational pensions, pensions accrued to working people, or both.

“Alternatively, the financing of pensions could of course be adjusted not only by cuts in pension benefits but also by increasing the pension contribution.

“However, it can be difficult because the stabilisation of the pension contributions has now been set as one of the objectives of the assignment,” she said.

Siimes stated there were “three moving elements” in the financing of occupational pensions – pension payments, income from occupational pension investments and pension benefits – and that she would keep all three on the table when planning the pension reform.

Among the difficult questions to be asked about the pension reform ideas so far, according to TELA, is what the generational and gender effects will be of introducing a stabiliser.

“If implemented, a rules-based stabiliser would also limit the decision-making power of the parliament, along with the bargaining power of the labour-market organisations,” Siimes explained.

At Elo, the mutual pension insurance company’s chief executive officer, Carl Petterson, told IPE he hopes that the negotiations in the new tripartite reform effort will move forward in the same manner as previous reforms.

According to Pettersson, the pension system does need some changes.

“The time horizon for investing pension funds is too short”

Carl Petterson, Elo’s CEO

“The time horizon for investing pension funds is too short,” he said, adding: “As a single factor, investment income has the most essential importance for the sustainability of the pension system.”

It was worth considering letting pension firms target higher investment returns, he said, adding that “slightly higher” risks could be taken.

“This measure can be implemented following the main principle that pension assets are safely invested for future generations,” Petterson said.

Noting the system is already in deficit – with more pensions being paid out than contributions coming in – the chief investment officer of Veritas, Kari Vatanen, said decreasing fertility rates would increase the deficit between pensions and contributions in future, so higher investment returns were needed.

But he questioned whether it would be possible to get the stipulated €1bn of annual cost savings from investment returns alone.

“The amount of private sector pension assets is €154bn, thus €1bn would mean additional 0.65% increase in the long-term expected returns in the future,” Vatanen told IPE.

“That requires higher allocation to the equities and other risky asset classes, so the reform would have to target to improve the pension investors’ ability to bear investment risk over the different market cycles,” he said.

On the public-sector side of Finland’s occupational pension system, Keva – which is chaired by Orpo – recently announced that it was increasing its investment risk level significantly in a bid to boost returns.

Read the digital edition of IPE’s latest magazine