Finnish employment pension reform was negotiated between labour market organisations

Rising life expectancy and falling birth rates have made pension finances an inevitable problem throughout Europe, and Finland is no exception. Employment pension reform proposals in Austria and France have resulted in widespread strikes. Such industrial action has been avoided in Finland, however, as the legislative reform package that is due to take effect in 2005 was negotiated between the trade unions, employers federations and government between 1998 and 2002.

At the request of Finnish labour market organisations, preparations for financing future pension payments began with partial reforms in the early 1990s. The process of drafting a new Employment Pensions Act began with negotiations between the national confederations of employees and employers in 1998. The Finnish government then tailored its own programmes to support the settlement reached in these negotiations, meaning that the new employment pension legislation is based on the agreements concluded by the labour market organisations in 2001 and 2002. Of the country s three employee confederations, only the Confederation of Unions for Academic Professionals in Finland AKAVA finally opposed the new pension accord, considering it to be contrary to the interests of highly educated employees.

- This was never an easy process at any stage. However, Finland has a long tradition of negotiated settlements and we did not wish to jeopardise this. It was generally thought preferable to adjourn the negotiation than to attempt any enforced settlement, explains Kaija Kallinen, Social Policy Secretary at the Central Organisation of Finnish Trade Unions SAK, who also describes the accord that was reached:

- Another factor that helped us to achieve a relatively untroubled settlement was that it will not touch pensions that have already been earned. The reform will only affect pensions accruing after 2005. In practice this will mean, for example, that the pensions of employees who are in the middle of their careers in 2005 will be determined according to two laws.

Apart from the current demographic distortion, restructuring of working life also necessitated a reform in employment pension legislation. It is nowadays unusual for employees to spend long working careers in the service of a single employer. Due to the general increase in short-period, part-time and temporary employment, the new legislation provides that accrued pensions will be governed only by earned income and the total length of time spent at work. The duration of individual employment relationships will no longer be a factor.

- Another important element in the settlement from SAK's point of view was that pensions will already begin to accrue from employment at the age of 18 years, Kallinen explains.

Under the old law, employment pensions began to accrue only at the age of 23 years. The average age at which employees join the regular workforce in Finland is 20.7 years. Employees working in the occupations organised by SAK-affiliated trade unions also tend to leave school and begin working life at an earlier age.

Pension settlement encourages longer careers

The prime objective of Finland s new pension model is to extend the average working career by two to three years. A combination carrot and stick approach will be taken. Anyone opting for voluntary retirement at the age of 62 years or less will suffer a permanent reduction in employment pension. Eligibility for the full pension will begin at the age of 63 years, but correspondingly, anyone who continues to work beyond this normal retiring age will be rewarded with higher pension accruals.

Under the new law, pensions will accrue at a rate of 1.5 per cent on wages earned between the ages of 18 and 52 years and 1.9 per cent on the earnings of employees aged between 53 and 62. The real incentive comes for the 63-68 age range, when the rate of pension accrual becomes 4.5 per cent of earned income.

Kaija Kallinen explains that the success of the model will largely depend on employers:
- If the economic situation is unfavourable, then employers will not keep people at work beyond the age of 63.

The Finnish Centre for Pensions has calculated that an increase of three years in the average age of retirement would reduce pension outlays by about 5 percentage points by the year 2030.

See also:
New formula agreed for calculating employment pensions (9.9.2002)