Pension System in Finland

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Pension System

The pension system in Finland is based on two complementary pension schemes. The National Pension public plan, and a compulsory occupational pension scheme. 

Voluntary occupational schemes and private pension savings are not well developed due to the dominance of the existing compulsory scheme.
Individuals have the choice to retire in an age bracket between 63 and 68, but there are strong financial incentives to retire later. Early retirement is possible as of the age of 62 linked to reductions of the pension income accounting for 0.6% per month. The Finnish parliament is trying to encourage later retirement to ensure that the state pension provides sufficient funding.

Public Pensions
The public pension system in Finland is based on the National Pension, which is intended to secure a minimum income for retirees whose earnings-related pension is small. The National Pension provides a flat-rate benefit of up to 20% of average wages in Finland, with minimum guaranteed income that is reduced by the amount of the earnings-related pension. Furthermore, it is residence-based; citizens qualify for it if they have lived in Finland for at least three years after reaching the age of 16. 

Compulsory occupational pension scheme
The statutory earnings-related occupational pension insurance is the backbone of the Finnish pension system, which is partially pay-as-you-go-financed and partly funded.

The administration of the compulsory scheme is decentralised to pension providers such as insurance companies, company pension funds and industry-wide pension funds that are independently acting as private sector financial institutions. 

Earnings-related pension provision is governed by several acts, each covering a certain group of employees, such as private sector employees, self-employed and public sector employees. In 2007, the pension acts for employees were unified into one act, the Employees Pension Act (TyEL), which covers more than two-thirds of the insured workers in the private sector.

The earnings-related pension is financed by contributions paid by both employers and employees. Under TyEL, contributions are unequally split between the employer and the employee. Employees aged between 18 and 52 pay 4.1% and those aged 53+ pay 5.2%. The employer bears the remaining lion's share. The precise contribution rate for the employer depends on its size; the basis is the total wage bill. The employer takes out pension insurance for the employees with the pension company of its choice.

Voluntary occupational pensions
Due to the strong compulsory occupational scheme, voluntary occupational pension schemes in Finland are less common than in other European countries. Currently these plans apply to only about 15% of the workforce, mainly executives.

Voluntary plans often simply involve paying additional contributions into the compulsory system. Voluntary occupational plans are defined benefit schemes with the same accrual rates as the earnings-related part of the state pension system. Employee contributions usually amount to around 3% of salary. However, some plans only require employer contributions.

There are three funding methods for voluntary pension plans, which can also be used to finance benefits under the earnings-related pension system. These are:

- Pension funds 
- Pension foundations 
- Insured schemes 

Pension funds and pension foundations
Pension funds and foundations play a minor role in the Finnish pension market. They account for only 15% of voluntary occupational pillar pension assets.

A pension foundation manages the contributions from employees of one single employer, while a pension fund covers the employees of several companies, normally in one particular industry. In both cases at least 300 members are needed to establish such a scheme. In general, full funding of pension liabilities is required for new schemes, an adjustment period applies for established ones.

Group insurance schemes
The overwhelming majority of compulsory and voluntary occupational pension schemes in Finland are financed by group insurance contracts. As in all Scandinavian countries, the pension market in Finland is highly insurance-oriented, with insurance companies holding approximately 85% of all occupational pension assets. These are tightly controlled by a handful of mostly local insurance companies. Employers must choose group insurance contracts if they have fewer than 300 employees covered under a plan.

Additional sources:
The Organisation for Economic Co-operation and Development (OECD) -