Finnish pension system 'effective' but further reform may be needed

The Finnish pension system efficiently alleviates poverty and provides a reasonable income for pensioners, although reforms may be needed to address a potential financing challenge in future, industry research has found.

In the evaluation of the Finnish pension system, which was presented to the Finnish Centre for Pensions this week, Professor Torben M Andersen identified a number of strengths compared to other Nordic pension systems.

This included the principle of a one-stop-shop, a simple structure, the portability of pension entitlements and pension adequacy.

The alleviation of poverty in retirement was highlighted in particular as a “crucial criteria” when assessing a pension system, with Finland coming out “on par or better” than in most other countries.

Andersen also pointed out that pension rules and benefit entitlements are not a barrier to job-shifts, meaning one less thing for workers to worry about.

Commenting on the findings, Andersen said: “From a citizen’s perspective the system is effective since the pension accrued across working life can be claimed and received on a one-stop-shop principle.

“Although Finland has not completely alleviated poverty in retirement, fewer pensioners fall below the generally used poverty lines compared to the overall population. Internationally, pension replacement rates are also relatively high in Finland."

However, whilst the future “looks positive”, Andersen warned that the income gap between pensioners and those active in the labour market will widen, primarily as a result of the life-expectancy coefficient and the wage-price indexation falling below average wage growth.

“Although indexation supports the financial sustainability of the pension system, the question is whether this development is politically sustainable. In the long run, inequality within the group of pensioners across education, gender and age, is widening,” he explained.

In light of this, he argued that Finland must continue reforming its pension system to strengthen its pension financing, stating that whilst the most recent automatic adjustment mechanisms continue to hold a “central role” for the sustainability of the pension system, they are not enough.

“The financial viability of the system is challenged in the medium to long run since the built-in adjustment mechanisms are not strong enough to ensure a balance between contributions and pension expenditures," he continued.

"Analysing the projections shows clearly that a problem is arising. It must be solved."

The report also warned that disregarding this problem could increase the likelihood of the need for large changes in the future, creating uncertainty and affecting intergenerational income distribution.

“That is why it is important to create a reform strategy in which it is decided if future increases to pension expenditure is financed in advance via raised pension contributions or whether the adjustment mechanisms are strengthened," Andersen stressed.

In addition to this, Andersen suggested that investment operations and solvency regulations should be also reformed. 

Commenting on the evaluation, Finnish Centre for Pensions managing director, Mikko Kautto, added: “Overall, the Finnish pension system fared well in the evaluation. In Finland, we haven’t necessarily understood to appreciate how simple and portable pension entitlements are across jobs for the insured.

“On the other hand, professor Andersen highlights the gaps in contribution levels and the outlook of contributions. A key topic of discussion arising from this evaluation is how we should meet the future financial challenges that our pension system faces.”

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