The Finnish government has announced plans to consult entrepreneurs extensively on options to reform the pension system to better meet their needs, confirming that it is "ready to reform the YEL system during this term of government".

The commitment was made following the conclusion of a year-long study into the development needs of the pension system for entrepreneurs, which was led by Dr Jukka Rantala.

The study was intended to find solutions that would improve the current way of determining an entrepreneur's pension contribution and the income on which the pension is based, as well as potential funding options and other necessary changes to develop the pension system for entrepreneurs. 

Income estimates were a key focus as, currently, when YEL insurance begins, the pension institution confirms the YEL earned income, on which both the insurance premium and the pension accrual are based. 

The defined YEL earned income also affects the income security of entrepreneurs, as it sets the baseline for, among other things, daily allowances under the Health Insurance Act, unemployment security and housing allowance. 

However, research from the Finnish Centre for Pensions (ETK), which supported the study, revealed that 74 per cent of entrepreneurs had taxable earned income higher than their YEL income.

In 2022, the average YEL income was approximately €22,500, almost 60 per cent of entrepreneurs had YEL income below €20,000.

However, ETK found that the taxable earned income from entrepreneurial activities was approximately €36,500 on average in 2022. For 46 per cent of entrepreneurs, the taxable earned income was €10,000–40,000.

Given this, Rantala suggested that an entrepreneur's income should instead be established through the taxable earned income from entrepreneurial activities, which would serve as the main rule for insurance.

According to Rantala, the change would clarify the definition of income, taking into account the entrepreneur's changing income and reduce underinsurance. 

Rantala acknowledged that this could result in potentially major changes, suggesting that a transitional rule could help to mitigate this.

In particular, Rantala suggested that the use of earned income for taxation could be switched to immediately after the law enters into force or at the latest when two years have passed since it entered into force. 

The income rule change was just one of five recommendations; however, as Rantala also encouraged the government to consider the possibility of switching to a model of earned income similar to the current one, when the defined earned income exceeds €35,000 per year.

The currently used earned income calculator would be developed to more accurately measure the value of the entrepreneur's work input (Work Input Meter).

Rantala also proposed that the four-month time limit for the insurance obligation be waived, and that the income limit for insurance be set at three times the TyEL lower limit, which would be around €2,520.

According to Rantala, this would improve the coverage of earnings-related pension coverage. 

Rantala also urged the government to monitor the effects of any reform and provide a report on the success of the reforms and possible new measures after five years.

Off the back of the recommendations, the government has confirmed that it will be consulting entrepreneurs extensively, with the intention of reforming the YEL system during this parliamentary term.

Minister of Social Security, Sanni Grahn-Laasonen, said: "The government is ready to reform the YEL system during this term of government in a way that increases entrepreneurship and promotes growth.

"The feedback from entrepreneurs has been heard and is very clear: the current YEL model is perceived as inconsistent and even arbitrary. We will launch an entrepreneur dialogue before Christmas and will consult entrepreneurs extensively."

The recommendations were welcomed by Ilmarinen director of insurance and pensions, Tiina Nurmi, who said that "we are happy that a solution is finally being sought to the matter". 

"The government now has new keys to solving the challenges of the YEL system," Nurmi added. 

"Income should be unambiguous and not based on an estimate . Internationally, it is rare for social security to be based on an estimate that requires discretion."

Nurmi also agreed that a hybrid model would be a good step towards earnings-based income if moving directly to an earnings-based model is too big a change at once.

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