Funding of earnings-related pensions

Old-age and disability pensions for private-sector employees are financed using a partially funded system. Some of the pension contributions collected annually are placed in funds and invested for future pensions.

Combination of a pay-as-you-go system and funding

Earnings-related pensions are financed using two main methods: the pay-as-you-go system and the fully funded system. The pay-as-you-go system means that the sum total of the pension contributions collected annually equals the sum needed to pay pensions in that year. In the fully funded system, the sum total of the pension contributions collected annually equals the sum needed for the future payment of the pensions earned in that year. These contributions are placed in a fund pending payment of the pension.

In a partially funded system, these two different ways of financing earnings-related pensions are combined.

A partially funded system means that some of the pension contributions collected annually from employers and employees are placed into productive funds, i.e. saved and invested for pensions paid in the future. The remaining annual contributions are used directly to cover pensions paid in the same year.

From the perspective of pensions currently in payment, a partially funded plan means that some of the pensions are financed by the pension contributions collected during the current year and some by assets deposited earlier in funds and their returns.

In a partially funded system, each generation finances a portion of the pensions of the currently retired generations, but also finances a portion for its own future pension at the same time.

Funding lowers the earnings-related pension contribution

Thanks to the partially funded system, earnings-related pension contributions remain lower than it would be under a purely pay-as-you-go system. This also helps to reduce labour costs and increases the employee’s take-home pay. From the individual’s point of view, funding has the benefit that assets are funded to secure old age when income is usually at its highest, i.e. during a person’s career. Funds, in turn, are dismantled when income is lower than during work years.

In a partially funded system, the returns on funded pension assets are also taken into account when the earnings-related pension contribution is determined. Thus, the level of the earnings-related pension contribution can be kept lower than would be the case if pensions were paid exclusively by means of annual pension contributions. In 2025, for example, without funding, about 2.9 percentage points (EUR 2.2 billion) more in earnings-related pension contributions in private sector should have been collected.

Without funding, earnings-related pension expenditure would be covered only through pension contributions collected from employers and employees. If earnings-related pension expenditure were to increase, earnings-related pension contributions would also rise immediately. On the other hand, if employment were to fall significantly, pension contributions would again have to be raised to cover the pensions paid. In both cases, labour costs would increase. Another option would be to cut the pensions paid.

In partial funding, in turn, the financing of earnings-related pensions does not depend solely on the labour market or the financial market; instead, the risks are distributed between these two.

In addition, partial funding mitigates the effect of differences in the sizes of generations on the level of pension contributions. As the population shrinks and an ever smaller proportion of the population pays the costs of pensions being paid out, a pure pay-as-you-go system would result in specific payment pressures on small age groups. Partial funding focuses the cost of pensions on the correct generation more accurately than the pay-as-you go system.

Funding of old-age pensions in the private-sector employee pension system

In Finland’s largest earnings-related pension scheme, the private-sector employee pension system (TyEL), assets are pre-funded for all employees aged 17–68 for old-age pensions. At present, for each employee insured under TyEL, assets corresponding to a pension accrual of 0.4 per cent of earnings are pre-funded for their future pension. Although the pre-funded pension accrual is earmarked for each individual, the assets covering it are not set aside separately.

In total, 3.7 per cent of wages is pre-funded for old-age pensions. Because investment returns are expected to be lower in the short term than the long term, a smaller share of the pre-funded old-age pension portion of the contribution is allocated to younger employees. The highest level of funding from contributions is allocated to 65-year-olds.

When calculating old-age-pension funding, it is assumed that the funds will generate an annual return of three per cent. In addition, the funds will be supplemented with investment returns in the long term. Regular fund top-ups will be made to increase the old-age-pension funds of insured individuals aged 55 and older. This method aims at keeping pension contributions stable.

Returns on funds must exceed the increase in wages and salaries

For the funding to be profitable, the long-term return on funded earnings-related pension assets must exceed the growth rate of the sum of gross wages and salaries paid annually. In this way, pensions can be financed at lower pension contributions than without the partial funding.

If the return on assets remained at the same level as the increase in wages and salaries, funding would no longer be a useful way to reduce the pension contribution.

For example, between 1997 and 2024, the insured sum of wages and salaries for private sector employees increased by an average of 2.1 per cent per year in real terms. The real return on earnings-related pension assets in the private sector during the same period was 3.9 per cent per year.

Funds are used every year

Each year, some earnings-related pension contributions are transferred into funds and, conversely, some assets in the funds are released to cover the earnings-related pensions payable in that year.

At present, about one-fifth of the earnings-related pension contributions paid by employers and employees in the private sector are transferred into funds. Correspondingly, funds cover about one quarter of the earnings-related pensions paid. Each earnings-related pension paid is divided into two: a part covered by contributions (so called pooled component) and a part covered by funds (so called funded component).

Some earnings-related pensions paid have always been covered by pension funds – even when the annual earnings-related pension expenditure was lower than the pension contributions collected. However, since 2013, earnings-related pension expenses in the private sector have exceeded the income collected as pension contributions. The difference between income and expenditure is covered annually by the funds and their returns.

The sources of financing for pension contributions and pension expenses are described in more detail on our page Circulation of pension money.

Each provider of earnings-related pensions in the private sector is responsible for funding among its own policyholders. However, all providers of earnings-related pensions are subject to the same rules and principles for implementing funding.

When the adequacy of funds is calculated, attention is paid to the returns gained on the assets funded and the adequacy of the pension for the insured person’s lifetime. The calculations also take notice of the fact that in the future, policyholders will receive pensions for different periods of time, depending on their life expectancy, and that some policyholders will not receive any pension at all owing to death before the retirement age.

Pension assets are not earmarked

In the Finnish pension system, no one has their own ‘pot’ of pension savings, and the pension contributions of individual policyholders (employees or self-employed persons) do not specifically target their own pension. Or, conversely, pensions paid to individual retirees do not explicitly include pension contributions paid by the persons themselves.

Instead, each employee and self-employed person accrues a certain amount of earnings-related pensions from the earnings of each calendar year. The pension system pays this accrued pension upon retirement on an old-age or disability pension. To prepare for this accrued pension, the insurer puts assets into funds for pensions to be paid in the future (this use of funds applies to employees only). In that sense, every insured person, and future retiree, is entitled to a funded part that is paid to him or her as a pension.

Thus, the insured do not have individual pension savings; instead, they have a statutory right to pension security as defined by law.

Funds can never be dissolved completely

For every calendar year, each insured employee accrues a previously agreed portion of an earnings-related pension of work. To prepare for the future, some of this money is placed into funds during the same year. As a result, more money comes into pension funds every year, even though the funds are simultaneously used to pay pensions to current pensioners.

This logic of continuous funding means that pension funds can never be dissolved completely. Every year, funded portions of pensions accrue from the pension rights earned in that particular year.

The funds therefore do not only contain the assets of present-day retirees, but also assets reserved for the pensions of all age groups who have been employed in the past and present.

Although the so-called baby boomers have already largely retired, pension funds have been used for paying their pensions only for a few years.

About 30 per cent of pensions come from funds

The Finnish Centre for Pensions calculates the value of accrued pension rights, i.e. the so-called pension entitlements. Pension entitlements refer to the amount of assets that would be needed to cover the future pensions accrued up to a certain point in time, if earnings-related pension contributions no longer provided financing for the payment of pensions.

At the end of 2025, the value of all accrued pension entitlements was EUR 1,127 billion. In this calculation, the discount rate used is the euro area risk-free nominal interest rate specified by the European Insurance and Occupational Pensions Authority (EIOPA) under the Solvency II Directive.

Correspondingly, the value of pension funds amounted to EUR 285 billion at the end of the year 2025. Thus, the funds covered about 25 per cent of the pension entitlements. The ratio is called the funding rate.

Pension reform increases funding

The 2025 pension reform meant that the current old-age-pension funding from pension contributions equivalent to 0.4 per cent was raised to funding equivalent to 0.5 per cent. The pension contribution’s old-age-pension portion used to finance the funding consequently increases from 3.7 per cent of salaries to 4.6 per cent. The increase of funding is thus significant.

In addition to increased funding, the 2025 pension reform includes investigating opportunities to improve the funding mechanism. The investigation includes assessing opportunities such as allocating part of investment returns to increase the old-age pension funds of those under 55.