The Finnish earnings-related pension system follows the principle of partial funding. This means that some of the pension contributions paid each year are put aside, or funded, for the coming years.

In the prive sector, about one euro in six is funded. The bulk of the contributions, about five euros out of six, is used directly for financing the current pensions.

This partial funding applies to the pension systems of wage-earners in the private sector. In the public sector, too, some of the earnings-related pension contributions are put into funds, but these funds are by nature buffer funds that are used to reduce the pressure to raise pension contributions in the future. Self-employed persons’ pensions and farmers’ pensions are pure pay-as-you-go systems, i.e. they do not involve any real funding.

Financing models are described in more detail on our page ‘Financing of pensions’.

Reducing future contributions as the aim

In the private-sector and public-sector pension systems, the assets funded are invested in the financial market. The aim of investments is to reduce future earnings-related pension contributions.

The long-term rule of thumb is that if the average annual return on investments rises by half a percentage point, the earnings-related pension contribution is reduced by one percentage point.

The equation also holds in reverse. If investment returns fall by half a percentage point in the long term, contributions must correspondingly be raised by one percentage point.

Investments must be spread

Pension providers must invest their assets profitably and securely. This requires that investments are spread among categories with differing risks. In addition, investments must be spread geographically. Not all pension assets can therefore be invested only in Finland.

Roughly one third of all earnings-related pension investments are in Finland. Another third is in other eurozone countries, and the last third is in countries outside the eurozone, such as Sweden, Switzerland, the United Kingdom and the USA.

The aim is to gain as good a return on the investments as possible while keeping the risks at a permissible level. Providers of earnings-related pensions in the private sector are subject to solvency regulations that limit the risks they can take in their investments.

Independent decision-making

All authorized pension providers make their investment decisions independently. The Board of Directors of each pension provider is ultimately responsible for the investment decisions made.

The Board of Directors decides on the plan concerning the investment of pension assets, i.e. the investment plan. It sets the overarching principles for investment activities. The investment plan describes, for instance, where investments are made and what the return targets are. In addition, the plan assesses the risks associated with investments.

Each authorized pension provider has a different investment plan. When drawing up investment plans, attention is paid to the legislation on authorized pension providers. The investment plans are also submitted to the Financial Supervisory Authority.