In a partially funded system, the pension provider calculates the technical provisions for each insured individual and pensioner insofar as assets have been funded in advance for pensions. Technical provisions are determined so that they will be sufficient, on average, for paying the funded part of the pension when the interest and mortality are taken into account.

Private-sector pension insurers put assets into funds in advance to prepare for old-age and disability pensions. Funding is carried out following rules specified separately for each pension type. The pension provider who has insured the employment contract is responsible for the funded part. These funded parts of pensions constitute one component of the technical provisions. The rest of the technical provisions consists of various buffer funds. Company pension funds call the item corresponding to technical provisions ‘pension liability’.

Technical provisions can be divided into two: provision for unearned premiums and provision for outstanding claims.

  • The provision for future pension contingencies is deposited in the provision for unearned premiums. The provision for unearned premiums also includes the provision for current and future bonuses and the equity-linked buffer.
  • The provision for pension contingencies that have already occurred but have not yet been fully paid is deposited in the provision for outstanding claims. The provision for outstanding claims also includes the provision for pooled claims.

The technical provisions and pension liability are supplemented yearly by a sum corresponding to the fund interest. In addition, funded old-age pensions can be raised annually by using a supplementary coefficient. The equity-linked buffer can also be increased or decreased by using an equity coefficient calculated annually.

This site covers the following issues associated with the calculation of technical provisions:

Components of technical provisions

The technical provisions of pension insurance companies and industry-wide pension funds consist of the provision for unearned premiums and the provision for outstanding claims.

Provision for unearned premiums

The components of the provision for unearned premiums are

  • provision for unearned premiums for future old-age pensions
  • provision for unearned premiums for future disability pensions
  • provision for current and future bonuses
  • equity-linked buffer.

As concerns old-age pensions starting in the future, the provision for unearned premiums is calculated for the individual’s entire work history. The provision is calculated by adding the necessary capital value coefficient to the amount of the funded old-age pension. The provision corresponds to the sum that, considering the interest, is sufficient for paying the funded old-age pension throughout the whole period when the insured individual is on old-age pension.

As concerns future disability pensions, the provision for unearned premiums is not calculated at the individual level. Instead, a certain percentage of each insurance policy is reserved for this purpose. The sum reserved for the provision corresponds to the percentage of disability pension contributions collected in the last two years that is sufficient to pay funded disability pensions during the next two years.

A pension insurance company’s provision for current and future bonuses is divided into two: provision for current bonuses and provision for future bonuses. (Industry-wide pension funds only have provision for future bonuses.) The provision for current bonuses is used to pay customer bonuses, and the provision for future bonuses is used to even out fluctuations in the value of investments and to prepare for currency risks. The provision for future bonuses consists of the return on investments and underwriting business. The provision for current bonuses is made up of assets transferred from the provision for future bonuses to the provision for current bonuses under certain conditions. Customer bonuses are paid from the provision for current bonuses.

An industry-wide pension fund transfers the return on investments to the provision for future bonuses, where it may also deposit the surplus from the fund department that grants supplementary benefits. After these transfers, the industry-wide pension fund can either cancel some of the provisions in order to reduce premiums or use premiums to build up the provisions.

By using an equity-linked buffer fund, the earnings-related pension system collectively bears some of the risk caused by stock market fluctuations. The amount of this buffer depends on the pension providers’ average returns on equity investments. On the basis of the pension providers’ realised returns on equities, this component of the technical provisions is either increased or decreased.

Provision for outstanding claims

The components of the provision for outstanding claims are

  • provision for outstanding claims for old-age pensions commenced
  • provision for outstanding claims for disability pensions commenced
  • provision for pooled claims

Assets for outstanding claims for old-age pensions commenced have already been reserved in the provision for unearned premiums during the individual’s working history. The calculation of the provision for outstanding claims for old-age pensions commenced starts when the individual retires on old-age pension. The provision corresponds to the sum that, interest included, is sufficient to pay the funded old-age pension for the remainder of the individual’s retirement.

The provision for outstanding claims for disability pensions commenced has assets reserved both for the disability pensions already granted (the ‘known’ pensions) and for the disability pensions where the pension contingency has already occurred but the pensions themselves have not yet been granted (the ‘unknown’ pensions).

The provision for known pensions is calculated at the individual level at the start of the disability pension. The provision is calculated by adding the necessary capital value coefficient to the amount of the funded disability pension. The provision corresponds to the amount of money that is sufficient to pay the funded part of the disability pension until the pensionable age.

The provision for unknown pensions is not calculated at the individual level. Instead, a certain amount of provision is reserved for these pensions from each insurance policy. The provision amount is obtained by reserving a certain percentage of the disability contributions paid during the past three years. This percentage is sufficient for paying the funded shares of disability pensions that have not yet been granted for pension contingencies already occurred.

Provision for pooled claims

The provision for pooled claims is a buffer fund for jointly paid pension components, such as survivors’ pensions, part-time pensions and index increments. Pension insurers pay jointly for the pooled components with the help of a cost distribution calculation made by the Finnish Centre for Pensions.

In the distribution of costs, each private-sector pension insurer is assigned a share of the pooled components. If this share is smaller than the assets received from the pooled components of pension contributions, the provision for pooled claims increases. Correspondingly, if the share is larger than the assets received from the pooled components of pension contributions, the provision for pooled claims decreases.

The above share of the provision for pooled claims is calculated separately for each insurance, but the provision for pooled claims also includes a component stemming from the equalization of the equity-linked buffer among pension insurers. This component is calculated separately for each pension insurer. Each pension insurer must cover the same amount of the equity-linked buffer in relation to the technical provisions used for calculating the solvency limit. When technical provisions develop at different paces from one pension insurer to another, this is equalized through the provision for pooled claims.

A minimum value has been set for the provision for pooled claims. This is 20 per cent of the total amount of pooled components for the next year. If the provision for pooled claims exceeds this minimum, the difference has also been used for covering pension liabilities in conjunction with some changes in actuarial principles and for supplementing funds.

In the future, any sums exceeding the minimum can also be used for alleviating the pressure to raise the TyEL contribution. The provision for pooled claims also includes the EMU buffer. Its target level is 2.5 per cent of all wages insured. The EMU buffer can be used to even out fluctuations in contributions caused by cyclical variations. The EMU buffer is discussed in more detail in our Q&A information package on the EMU buffer.

Components of pension liability

The pension liability of a company pension fund includes

  • the pension liability for future pensions
  • the pension liability for pensions commenced
  • the provision for current and future bonuses
  • the equity-linked buffer.

The pension liability for future pensions comprises pension liability for future old-age pensions and future disability pensions. These components of the liability are calculated following the same procedure as when a pension insurance company or an industry-wide pension fund calculates the provision for unearned premiums for future old-age and disability pensions.

The pension liability for pensions commenced is divided among old-age pensions commenced and disability pensions commenced. These components of pension liability are calculated in the same way as when a pension insurance company or an industry-wide pension fund calculates the corresponding components of the provision for outstanding claims. A company pension fund’s pension liability for pensions commenced also includes the provision for pooled claims. This is determined in the same way as for pension insurance companies or industry-wide pension funds.

The provision for current and future bonuses corresponds to a pension insurance company’s provision for future bonuses. A company pension fund transfers the return on investments to the provision for current and future bonuses, where it may also deposit the surplus from the fund department A, i.e. from voluntary supplementary pensions. After these transfers, the company pension fund can either cancel some of the provisions in order to reduce contributions, or it can use contributions to build up the provisions.

The equity-linked buffer is the system’s joint risk buffer to offset fluctuations in returns on shares. Company pension funds determine it in the same way as pension insurance companies or industry-wide pension funds.