The Finnish pension reform agreed in January will increase the volatility of the employers' pension insurance (TyEL) pension contribution, but over the long term, expected returns are higher as a result, according to new analysis by the Finnish Centre for Pensions (ETK).

The reform includes amendments to the investment regulation of occupational pension insurers to allow more equity exposure and the introduction of a third automatic stabiliser – the inflation stabiliser.

In its report examining the implications for the reform, ETK also found that the average level of pension contribution is expected to decrease.

In addition to this, ETK examined the reform’s inflation stabiliser, which affects current earnings-related pension benefits. In practice, this will limit the growth of the earnings-related pension index if wage levels increase more slowly than prices.

According to calculations by ETK, the impact of the index restriction on pensions is minor.

ETK’s analysis includes calculations based on stochastic population forecasts, as well as institution-specific projections, evaluating the long-term effects of the reform, up to the year 2090.

It has examined the impacts of the pension reform through four distinct calculations.

In each scenario, investment returns, inflation, and wage development are modelled using stochastic modelling. This means that the calculations consider thousands of possible future scenarios, each generated according to specific rules.

ETK explained that presenting several alternative calculations highlights that there is no single correct way to model these phenomena.

The calculations have been conducted using ETK’s long-term projections model (LTP), which has been developed to simulate the funding of the entire earnings-related pension system over several decades.

The baseline scenario’s stochastic projections are derived from 5,000 scenarios generated using ETK’s Feeniks investment return model.

This stochastic baseline calculation has also been conducted on an institution-specific basis using ETK’s pensions’ short-term model, which allows for an assessment of pension institutions’ solvency ratio, equity weighting, bankruptcy risk and returns.

In addition, the report contains three alternative calculations evaluating the effects of the pension reform. The first alternative combines investment returns from the Feeniks model with a stochastic population forecast, while the second uses Statistics Finland’s 2024 population projection.

The third alternative calculation utilises the investment return model developed by Ortec Finance.

This model is widely used by pension providers in various countries and can generate similar scenarios to those produced by ETK’s Feeniks model.

---