New formula agreed for calculating employment pensions

Pension reform to be introduced in 2005

A new formula for calculating employment pensions in Finland will be introduced in 2005. On 5 September 2002 Finland's labour market organisations reached agreement on the new formula and on the reform of certain other aspects of the pension system.

The agreement forms part of a broad package of social reforms concerning pensions and unemployment benefit that was reviewed last autumn. Agreement was reached at that time on amendments to early retirement arrangements and on improvements in unemployment benefits, but no accord could be found on the formula for reckoning employment pensions.

The compromise solution that has now been reached was approved by all of the parties involved, with the exception of the Confederation of Unions for Academic Professionals in Finland - Akava, and applies to employment pensions in the private sector. It has been submitted to Maija Perho, Finland's Minister of Social Affairs and Health. Separate negotiations will focus on the pension arrangements for those in the public sector working for State and local authorities. The goal is for the Parliament of Finland to consider the new pension laws in October. The new system will take effect in 2005.

SAK realises its main objectives

The new compromise solution realises the main pension reform objectives sought by the Confederation of Finnish Trade Unions - SAK. The revised formula for calculating pensions will make the system fairer and more straightforward, and will restrain the tendency for pension fund contributions to rise. In particular, it will improve the situation of younger employees and casual workers. The pension coverage of parents with young children will also improve.

Finland will introduce a flexible retirement age, allowing employees to retire at any time between the ages of 62 and 68 years. One of the prime objectives of the reform was to increase the average age of retirement by a few years, and the new pension system incorporates an incentive for employees to continue working: the longer the employee remains at work, the higher the eventual pension becomes.

The pension system allows for the general increase in life expectancy. Extended life expectancy will reduce the pension payable, and eligibility for a full imputed pension will then be secured by remaining at work a little longer.

Average wage formula an equitable approach

SAK has long advocated a pension formula whereby pensions are reckoned on the basis of the employee's total career earnings. Finland currently uses a formula in which the pension is reckoned on the basis of the last ten years of each employment relationship. This formula is unfair to employees who have worked for shorter periods in several such relationships. SAK has stressed that pensions should be based on wages earned and pension fund contributions paid. Pension insurance experts calculate that the changeover to the average wage formula will benefit three out of four employees.

It was also very important to SAK to stress the wage weighting in the index used for reckoning pensions. The reform will now increase the wage proportion from the current 50 per cent to 80 per cent. This benefits young people in particular, as it retains the pension components earned by younger employees.

The position of young adults will also be improved by a reduction in the cut-off age for pension accrual from 23 to 18 years. SAK has long campaigned for such a reform. While young people currently pay pension contributions, their pensions begin to accrue only on reaching the age of 23 years.

The new negotiated pensions settlement will also enhance the pension coverage of the parents of young children. After 2005 pensions will accrue for all periods of statutory child care leave. The proposal will also ensure that pensions accrue for periods of illness and unemployment.

Three-tier pension accrual

Pensions will accrue in three stages under the new formula: the present annual accrual rate of 1.5 per cent will continue for those under 53 years of age, the rate for employees aged between 53 and 62 will be 1.9 per cent, and those over 63 will accrue pension at an annual rate of 4.5 per cent. Employees over 53 years of age will correspondingly pay just under one third more in mandatory employment pension contributions than are payable by younger employees.

According to Kari Puro, Managing Director of the Ilmarinen pension company that led the pensions task force, there may be an initial slight interim rise in employment pension outlays when the reform takes effect, but the new pension system will bring clear cost savings in the longer term.

The pension reform in a nutshell

- Pensions will begin to accrue at the age of 18 years and will be calculated based on whole career earnings.

- A three-tier pension accrual formula will apply. The longer the employee remains at work, the greater will be the pension that accrues. The 60 per cent pension ceiling will be abolished. Employees over 52 years of age will pay higher employment pension fund contributions.

- Allowances will be made for increasing life expectancy. If life expectancy rises, then pensions will fall and employees will have to work a little longer to become eligible for a full imputed pension.

- The proportion of earnings in the wage coefficient used for calculating pensions will increase to 80 per cent and the proportion based on the retail price index will fall to 20 per cent.

- Pension will accrue for periods of statutory child care leave, and for periods of studying, illness and unemployment.

- Pensions earned before 2005 will be reckoned using the previous regulations. The pensions of employees entering working life in 2005 and thereafter will be reckoned entirely under the new system.

- The reform will apply to employees working in the private sector. Separate negotiations will be held on public sector pensions.