Finnish pension (investment) system 28th Ljubljana Stock Exchange Conference May 2011 Mika Vidlund
2 Contents Overall picture of the Finnish pension system EU-Commission s guidelines for how to make pension system financially sustainable
Implementation of the earnings-related pension scheme Ministry of Social Affairs and Health Financial Supervisory Authority Ministry of Finance National Audit Office Financial Supervisory Authority (investments) Pension insurance companies TyEL, YEL (7) Company pension funds TyEL (15) Finnish Centre for Pensions Farmers Social Insurance Institution MyEL Seamen s Pension Fund MEL Public sector: Keva KuEL VaEL KiEL Industry-wide pension funds (7) TyEL,YEL Other public actors Ev.lut. church, Orth. church, SII (Kela), Bank of Finland, Regional Government of Åland Insured and policyholders 3
Division of costs for earnings-related pensions Insured persons and employers Pension recipients Pension provider A Collects insurance contributions for the year Pays the pensions for the year Data communications and money flow Pensions data Data on pensions paid Contributions data Contributions data based on wages and salaries of insured persons Decision on distribution of liability Finnish Centre for Pensions Distribution (clearing) of liability to pension provider A Distributionof-liability payment 4
Finnish pension system: Major reform in 2005 5 The reform brought closer link between life time earnings and the pension. - Pension is based on whole career-average earnings instead of traditional DB final salary model Flexible retirement age with life-expectancy adjustment Finnish pension model comparable in many respects to Swedish and Norwegian NDC-models
Structure of the Finnish pension system 6 Pension euros / month 1750 1500 1250 No income or pension ceiling Partially funded Flexible retirement age: 62-68 1000 750 500 250 0 0 500 1000 1500 2000 2500 3000 3500 Wage euros / month DB-scheme, accrual rate: Ages 18-52: 1.5 % Ages 53-62: 1.9 % Ages 63-68: 4.5 % Life-expectancy coefficient Decentralised administration - joint liability Earnings-related Residence-based Guarantee Net
7 Distribution of total pension for persons receiving a pension in their own right 31.12.2009 Pension recipients 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 Average total pension 31.12.2009 /month All Women Men 1 344 1 196 1 530 Women Men 599 600 900 1200 1500 1800 2100 2400 2700 3000 899 1199 1499 1799 2099 2399 2699 2999 Pension /month
Projected (theoretical) replacement rates in EU15-countries % of average earnings 100 Statutory pensions Occupational pension 80 60 40 20 0 8 UK IE BE DE DK FI SE FR AT NL PT IT ES LU EL Source: EU/SPC/ISG 2009
Projected (theoretical) replacement rates in EU12-countries % of average earnings 100 Statutory pensions Occupational pension 80 60 40 20 0 Source: EU/SPC/ISG 2009 9 RO EE LT BG CY SK CZ LV PL HU SI MT
Pension insurance in Finland in 2009 10 Premium income and Pension expenditure, bn 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Premium income Pensions paid Technical provisions Technical provisions, bn 140 120 100 80 60 40 20 0 National pension Statutory earnings- Related pension Occupational pension Personal pension 10
11 Public and private benefit spending, % of GDP (old-age and survivors benefits) 18 16 14 12 10 private public OECD average 8 8,4 6 4 2 0 Source: OECD, PaG 2011
12 Statutory earnings-related pension (TyEL, private sector) expenditure and contribution percentage in the years 2008 2075, % of wages 35 30 25 20 15 10 Expenditure Contribution 5 0 2008 2010 2015 2020 2025 2030 2050 2075 Source: Finnish Centre for Pensions
Assets in pension funds and public pension reserve funds in 2009, % of GDP 13 DK NL NO CH IS SE UK FI US IE CY LU PT BE PL ES HU FR EE CZ DE AT SK IT SI LV LT 0 20 40 60 80 100 120 140 160 Source:OECD 2011
Source: TELA 14
Source: TELA, for more details: www.tela.fi 15
Source: TELA, for more details: www.tela.fi 16
Source: TELA, for more details: www.tela.fi 17
Source: TELA, for more details: www.tela.fi 18
Private pension provision 19
Personal pension savings 20 Act on long-term savings (PS agreement), entered into force on 1 January 2010, introduced new tax subsidized alternatives to voluntary pension provision other than traditional insurance savings. Possible new product proposed by Ministry of Finance: a longevity pension (or over 80 s pension) - A supplementary annuity of EUR 800 a month would be secured after the payment of a lump-sum premium of between EUR 40,000-60,000 at the age of 60 s.
21 Investment portfolio of PS-assets at the end of 2010 PS-deposits Time deposit Listed equities/shares Bonds Funds 47 % 29 % 19 % 3 % 2 % Source: BoF
22 Tax incentives for personal pension saving Premiums are tax-deductible up to the amount of EUR 5,000 per year. - 28 % capital tax; max. deduction EUR 1 400 Individuals savings will be allocated to personal accounts and only taxed when benefits are paid, according to the EET system In order to take advantage of the tax relief on premium payments, contributions will be locked in until the statutory retirement pension age (currently 63), and benefits paid over a period of 10 years
The number of (new) personal pensions and long-term savings (PS agreements; left axis) and premium income (right axis), 2000-2010 23 140 000 Contracts, individual Contracts, firm Premium income mill. 140 120 000 120 100 000 100 80000 60000 40000 20000 PS-accounts, 2010 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 0
Premiums written on personal pension policies 2002-2010 24 million 600 500 400 300 200 382 226 407 412 292 361 382 368 276 400 500 500 465 Unit-linked Traditional 258 253 242 483 200 100 0 2002 2003 2004 2005 2007 2008 2009 2010
How to make pension system financially sustainable? 25 EU-Commission, Annual Growth Survey 12.1.2010, COM(2011) 11 final: Member States that have not already done so should increase the retirement age and link it with life expectancy. Member States should reduce early retirement schemes as a priority, and use targeted incentives to employ older workers (55+) and promote lifelong learning. Member States should support the development of complementary private savings to enhance retirement incomes.
26 Life-expectancy adjustment Automatic link between pensions and life expectancy - major innovation in pension policy in recent years. (OECD) Soulless calculation machine (Austrian social minister Erwin Buchinger)
Different ways of linking pensions to life expectancy 27 Mandatory DC plan Notional accounts scheme Benefits linked to life expectancy Qualifying conditions linked to life expectancy Austria (X) (X) Belgium Czech Republic Denmark X Estonia X Finland X France X Germany X Greece Hungary X Iceland Ireland Italy X Latvia X X Luxembourg Netherlands Norway X X Poland X X Portugal X Slovak Republic X Slovenia Spain Sweden X X Switzerland Turkey United Kingdom
28 In Finland Measures aimed at lengthening working careers which can be divided into two groups: measures related to developing working life and measures aimed at developing statutory pension schemes. prepared by tripartite groups Recalibrated aim in 2009: to raise the effective retirement age by at least 3 years by 2025 compared to situation in 2008.
Development of the expected effective retirement age 29 Expectancy 63.0 62.5 62.0 61.5 61.0 60.5 60.0 59.5 59.0 58.5 New target set in 2009 Expected retirement age for 25-year-olds (realised) Objective set in connection with the 2005 pension reform 58.0 2002 05 08 11 14 17 20 23 26 29 32 35 38 41 44 47 2050
30 Thank you! For additional information: mika.vidlund@etk.fi