Calls grow for long-term Finnish pension reforms

Calls for a long-term reform plan to address potential future financial challenges facing Finnish earnings-related pensions have been backed by the Finish Pension Alliance (Tela).

Tela managing director, Suvi-Anne Siimes, argued that the challenges facing the system do not require "immediate solutions", but should instead be addressed through "durable and responsible" long-term changes.

“The outlook for funding earnings-related pensions is stable far into the future. As a consequence, we have plenty of time right now to consider and prepare reforms to the pension system in a durable and responsible manner. This time must also be used wisely,” Siimes stated.

The comments were made in response to the recent evaluation of the Finnish pension system from Professor Torben M. Andersen, which found that whilst the Finnish pension system was "effective", long-term changes would be needed.

In particular, Siimes noted that whilst Andersen suggested that flexibility of contributions could play a role in bringing stabilisation, this has received surprisingly little coverage in Finland.

An automatic adjustment mechanism was also highlighted by Andersen as a possible way to ensure financial sustainability, as in Sweden, where earnings-related pension provision is in part flexible depending on the financial status of the pensions.

However, Siimes warned that there must be consideration of the differences in structure of pension provision in various countries taken into account.

For instance, she explained that in Sweden, the automatic adjustment mechanism only applies to a part of the total pension provision, whilst in Finland, earnings-related pensions are the principal form of income in retirement.

"Therefore, ‘automatic fluctuation’ of the level of the earnings-related pension would easily cause more problems here than in our neighbouring country," she said.

In addition to this, Siimes warned that automatic adjustment mechanisms have not eliminated the need for political decisions in Sweden, explaining that the effects of the mechanism have been mitigated or even completely eliminated through tax changes.

She continued: “It is also noteworthy that decision-making on pensions in Finland is decentralised between the social partners and the parliamentary system.

"Political power has historically been, and is, greater in Sweden. It would be a major value selection to end up in the same situation in Finland as well.

“Raising the retirement age has gained approval in Finland through a long social process, and linking the retirement age to life expectancy is mostly seen as a natural idea. The low birth rate now requires similar reflection within the pension system.

“One way of solving the problem of low birth rates would be to strengthen pre-funding, an idea also supported by Andersen. I would have wanted to see a broader analysis of this alternative to automatic stabilisation in the report,” Siimes says.

Siimes also commented on Andersen's suggestion that the functioning of the mechanism governing the relationship between funding and investment in the private sector of the pension system should be assessed.

“It’s quite true that, over time, this mechanism has become a multi-layer structure only a few understand completely. This may lead pension providers to an inappropriate relationship between risk-taking and risk avoidance, and may be seen, for example, in high investment costs,” she explained.

"Although Andersen does not directly propose a complete overhaul of the mechanism, such an option should not be ruled out for long-term and responsible development of the pension system."

    Share Story:

Recent Stories

Podcast: The benefits of private equity in pension fund portfolios
The outbreak of the Covid-19 pandemic, in which stock markets have seen increased volatility, combined with global low interest rates has led to alternative asset classes rising in popularity. Private equity is one of the top runners in this category, and for good reason.

In this podcast, Munich Private Equity Partners Managing Director, Christopher Bär, chats to European Pensions Editor, Natalie Tuck, about the benefits private equity investments can bring to pension fund portfolios and the best approach to take.

Podcast - The power of three: Using Common Contractual Funds to improve tax outcomes for investors
Large asset owners are still investing in equities in a way where they are taxed on their income. The implication is that they get a poorer return. They need to, and can, improve this, but how?

In this podcast, AMX Head of Client and Manager Development, Aaron Overy, and AMX Product Tax Specialist, Kevin Duggan, discuss with European Pensions Editor, Natalie Tuck, about three options to help ensure good withholding tax outcomes for institutional investors.
Mitigating risk
BNP Paribas Asset Management’s head of pension solutions, Julien Halfon, discusses equity hedging with Laura Blows

Europe’s pensions challenges
Francesca Fabrizi meets Matti Leppälä, Secretary General and CEO of PensionsEurope, to discuss the key aims and objectives of the association today.