Earnings-related pension is statutory insurance. It is the right of all employees and self-employed persons. Its purpose is to guarantee adequate income for everyone in the event of old age, disability, or the death of the family’s breadwinner. The earnings-related pension is the main security for retirement years. Its amount is determined individually depending on each person’s own earnings during the work history. Absence from work because of various life situations is also taken into account when the pension is calculated.

The goal of the earnings-related pension is to maintain the reasonable consumption level attained in work life during retirement. The time of retiring is flexible. The longer people continue at work, the higher their level of pension will be. The earnings-related pension system is – and will remain – fair from the perspective of different generations. For our part, we work to ensure that young people can be confident that, when the time comes, they will also get reasonable earnings-related pensions.

In Finland, pension provision is very transparent. The Pension Record allows everyone to monitor the development of their own earnings-related pension. It’s good to check the record regularly for the earnings accumulated and the amount of the pension accrued.

How is earnings-related pension provision organized?

In the private sector, earnings-related pensions are provided by pension insurance companies, company pension funds, industry-wide pension funds and specialized pension providers. In the public sector, Keva bears the main responsibility. When jobs and pension insurers change, the pension information follows along.

Employers are responsible for insuring their employees, whereas self-employed persons, farmers and grant holders make their own arrangements for earnings-related pension insurance. Not only companies but also households that pay wages must provide insurance cover. The employee’s pension insurance is compulsory if the monthly salary paid to the employee is at least EUR 58.27 in 2018.

Small employers and households can take care of their statutory employer’s obligations through the Palkka.fi portal. This is a free payroll computation program developed by the Finnish Tax Administration and authorized pension providers.

Financing of earnings-related pensions

Earnings-related pensions are financed from pension contributions and from returns on investments made by pension funds. The model is mainly based on the pay-as-you-go system: the insurance premiums collected each year cover the earnings-related pensions paid. However, not all pension contributions collected from salaries and not all returns from funds are currently used for pensions. Partial funding is applied, for instance, to provide for the ageing of the population.

The earnings-related pension contribution is an insurance premium that is collected from all employees and self-employed persons between 17 and 67 years of age. In 2018, the average pension contribution for private-sector employees is 24.4 per cent of their wages. The employee’s share is 6.35 per cent for under 53-year-olds and for those who have turned 63. The share is 7.85 per cent for those who have turned 53. The employer pays the rest.

Self-employed persons are themselves responsible for their pension contributions. The confirmed income determined by the self-employed person forms the basis for the earnings-related pension and for other social security. It is the self-employed person’s own estimate of the price of his or her work, and it should correspond to the real value of the self-employed person’s work input. In 2018, the self-employed person’s pension contribution is 24.1 per cent of the confirmed income for under 53-year-olds and those who have turned 63 and 25.6 per cent for those who have turned 53.

Principles of earnings-related pensions

The key principles of earnings-related pension provision are:

  • based on earnings
  • lifelong
  • no cap
  • index-linked

Based on earnings: pension depends on work history

Earnings-related pension accrues on all paid work done in Finland that exceeds the minimum insurance limit (monthly salary at least EUR 58.27 in 2018). Earnings-related pension accrues specifically on the basis of work; for instance, income from capital does not affect it. The sum accrued is obtained by multiplying the combined income for a calendar year by the accrual rate of 1.5 per cent.

The accrual of pension starts at the beginning of the month following the 17th birthday (starting from 2017) and ceases at the end of the month when a person turns 68. If a person does not apply for a pension at the age of 68 years, an increase for deferred retirement is calculated for the pension. Any work done while on pension also increases the pension until the age of 68 years. People who are retired on old-age pension are free to work of their own volition.

In addition to paid work, pension also accrues on certain unpaid periods, which are

  • periods of maternity, paternity and parental allowance
  • periods of earnings-related unemployment benefits
  • job alternation leaves
  • other periods of earnings-related allowances (e.g. sickness and rehabilitation allowances)
  • studying towards a qualification or a degree.
  • child home care allowance for a child under three years of age.

The prerequisite for the accrual of pension during these unpaid periods is that, at some point in the person’s work history, the earnings entitling him or her to an earnings-related pension total at least EUR 17,480.28 (the level for 2018).

People whose earnings-related pensions are small and who are living in Finland are also eligible for a national pension and a guarantee pension. These are benefits included in the basic social security and are paid for by the Social Insurance Institution (Kela).

Lifelong: the pensions earned are maintained

Any earnings-related pension already earned cannot be lost. Even if people change jobs, or switch from being an employee to a self-employed person or vice versa, the pension rights accrued thus far will stay with them. Moreover, all changes made to the pension system always concern the future, never the pension rights already accrued.

No cap: no maximum limit for earnings-related pensions

Earnings-related pensions have no maximum sum. In other words, all work done increases the pension. All earnings-related pensions earned during the work history are paid in full when the time comes. The exception is the integration of pensions, where indemnities paid under motor liability insurance and accident insurance are deducted from the earnings-related pension. If these indemnities reach a certain level, it is possible that no earnings-related pension remains to be paid.

The topic of a pension cap arises in public debate from time to time. It is often forgotten that even though high earnings increase the future earnings-related pension in full, pension contributions are also calculated on the whole salary. In contrast, the pension cap in use in some countries generally also includes a contribution cap, i.e. the insurance premium is paid only up to a certain limit. If the Finnish model were altered in this direction, the pension contributions paid by employees and employers would have to be raised sharply.

Index-linked: changes in the value of money are considered in pensions

Changes in the value of money are taken into account when earnings-related pensions are calculated and paid. The buying power of pensions is ensured for both current and future pensioners. The mechanisms used here are the wage coefficient and the earnings-related pension index.

The wage coefficient is applied when the amount of a person’s pension is calculated at the time of retirement. By using the wage coefficient, all earnings during the work history are converted to the level prevailing in the retirement year. The wage coefficient takes changes in earnings and prices into account. The main emphasis is on the change in earnings.

The earnings-related pensions in payment are adjusted annually in January using the earnings-related pension index that also takes account of changes in earnings and prices. However, the main emphasis is on the change in prices.

During the early years of the earnings-related pension system, the index increments of pensions were based solely on wage trends. Subsequently the weighting of the index has been shifted so that increasing attention is paid to the change in prices. Through the amendments made in the past, conscious and important measures have been taken to relieve the pressure to raise pension contributions. If the current model were altered so as to place more weight on wages, pension contributions would rise and the impact on younger generations would be unfair.

Earnings-related pension is not only old-age pension

Earnings-related pension contributions insure earners not only for old aged but also for disability and the death of the family’s breadwinner. Apart from old-age pension, the pension benefits proper are partial old age pension, disability pension, partial pension for disability, the years-of-service pension, surviving spouse’s pension and child’s pension.

For instance, in the event of the breadwinner’s death, the survivors’ pension ensures the livelihood of the widowed spouse and children under 18 years of age, under certain conditions.

Rehabilitation allowance and partial rehabilitation allowance are paid to persons who participate in vocational rehabilitation provided under the earnings-related pension system. The pecuniary compensation for vocational rehabilitation is always higher than disability pension.

The conditions for various pension benefits and the structure of pensions are discussed in more detail on Työeläke.fi, the joint website of the earnings-related pension sector.

The Pension Record reveals the accrual of earnings-related pension

The Pension Record shows how much earnings-related pension you have accrued by the end of the previous calendar year and what earnings are included in the calculation of the pension. The Pension Record does not indicate the exact amount of your future pension. The record contains data on your work history and earnings in both the private and the public sector.

In addition to the earnings that a person has obtained as an employee and through self-employment, the pension record also shows the data on social benefits that add to the pension. For people who are 50 years or older, the record also includes an estimate of their future old-age pension.

It is good to check the work history, earnings and relevant social benefits entered into the pension record. It is important to check the data because, in the future, the responsibility for the correctness of the information is gradually shifted to the insured themselves. If you notice errors or omissions on the record, you should contact the pension insurer that has sent the record. If the data are correct, you don’t need to do anything.

It is easiest to check the pension record online either on the website of your own pension provider or at Työeläke.fi To use the service, you need your personal bank identifiers or an ID card with a chip. The electronic record may contain slightly newer data than the paper copy. In addition, the electronic record also shows an estimate of the future old-age pension for people who are under 50 years of age. The electronic record can be checked at any time.

Pension providers also send pension records by post to the home addresses of people who are between 18 and 67 years of old and live in Finland. People working in the private sector get their record once in three years. Those who are over 60 years of age receive the record yearly. The pension record is not sent to people already on pension.

More detailed information on the distribution of pension records is available on the Työeläke.fi site