The Finnish earnings-related pension system is a benefit-based system. This means that the size of the benefit, i.e. the pension, has been agreed beforehand, and the assets needed are collected as pension contributions. The financing of earnings-related pensions can be organized using two main methods: the pay-as-you-go system and the fully funded system. Most Finnish earnings-related pensions are financed using a combination of the two, a partly funded system.

In the pay-as-you-go system, the sum total of the pension contributions collected annually equals the sum needed to pay pensions in that year. In Finland, the pension systems of self-employed persons and farmers are financed by pension contributions and tax revenues, and follow the principles of the pay-as-you-go system.

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. When the fully funded system is applied, each generation saves the funds needed for its own pensions. In that case, the returns on the fund savings can also be used to pay some of the pension expenses; this reduces the contribution needed.

It is also possible to implement a funded system in part, as has been done in Finland with respect to the private-sector pension systems. The pension systems of private-sector employees and seafarers operate on this partly funded principle, where some of the pension contributions paid each year are put into a fund for future years.

By nature, the pension systems of municipal and State employees are pay-as-you-go systems, but they also include certain buffer funds. The buffer funds help reduce the pressure to raise earnings-related pension contributions in the future.

The financing of the various earnings-related pension systems has been described in greater detail in the following sections:

More detailed information on earnings-related pension contributions and on the ways of determining them is available on the page “Earnings-related pension contributions”.

Financing the pensions of private-sector employees

The pension system of private-sector employees is a partly funded system. Some of the pension contributions collected each year are put into a fund for future pensions, while the remainder is used to finance the pensions paid in that particular year.

As concerns the present pension contributions in the private sector, about one euro out of six is put into a fund and the rest is used for the payment of current pensions. Thanks to investment returns, the sum transferred to funds accounts for a greater percentage of pension expenditure than it accounts for contributions. One in four pension euros is obtained from funded assets.

Because some pension contributions are placed in funds, pension providers are better prepared for changes in the population’s age structure. Since the funds can be used to cover some of the financing needed for pensions, the contributions obtained from employees do not need to be raised unreasonably high.

When the earnings-related pension system was established, the partially funded structure also enabled better pension benefits than would have been possible in a fully funded system.

Themes concerning liabilities and solvency, associated with pension contribution funds, are discussed on the page “Pension providers’ liabilities and solvency”.

Financing the pensions of self-employed persons

The pensions of self-employed persons are financed using the pay-as-you-go system. In other words, they do not involve funding. However, as a rule, the pension contributions collected from self-employed persons are not sufficient to cover the annual pension expenditure, owing to the older age structure of self-employed persons. In that case, the State covers the shortfall existing between the self-employed persons’ pensions due for payment and the contributions collected.

Financing the pensions of farmers

Farmers’ pensions are also financed using the pay-as-you-go system, without funding. Since the number of people receiving farmer’s pensions is double the number of people insured, the pension contributions collected annually are not sufficient to cover the annual pension expenses. In that case, the State covers the shortfall existing between the farmers’ pensions due for payment and the contributions collected.

Financing the pensions of seafarers

The system of financing seafarers’ pensions is largely the same as that applied to the pensions of private-sector employees. However, there is the difference that the State participates in seafarers’ pension costs by paying less than one third of the pension expenditure.

Financing pensions in the municipal sector

Until 1988, pensions in the municipal sector were financed using solely the pay-as-you-go system. A legislative amendment that entered into force at the beginning of 1988 made it possible for Keva to prepare for future pension expenses by depositing some of the pension contributions into funds.

The funds have given Keva a buffer which makes it possible to keep the pension contributions collected from employees and employers at the current level. The assets transferred to the fund or the assets withdrawn from the fund later are decided separately each year.

According to forecasts, a considerable portion of the funds will be used between the years 2020 and 2050. Those will be the peak pension years of the post-war baby boom generation and that’s when the pension expenditure will also reach its highest point in relative terms.

Financing the pensions of State employees

In principle, State pensions are financed using the pay-as-you-go system. Funds have been adopted as a buffer to even out the costs of future pensions, both by means of investment returns and by taking assets from the fund.

The State Pension Fund is a fund outside the State Budget that was founded in 1990. It places pension assets into funds and makes investments. However, the State Pension Fund does not pay pensions directly. Instead, all pensions in the State pension system are paid from appropriations reserved in the State Budget annually.

Each year, the State Pension Fund transfers a sum to the State Budget. This sum corresponds to 40 per cent of the annual pension expenditure. The State Treasury, in turn, ensures that the necessary assets are transferred to Keva, which in practice pays the State’s pensions.

The State Pension Fund Act has set a target for the State Pension Fund whereby 25 per cent of the full pension liability arisen within the State pension system must be deposited into a fund. According to estimates, this target will be reached in the mid-2020s. Once the target has been reached, it will be decided in the State Budget how much of the fund assets will be transferred yearly to the State Budget.

Financing pensions in other public sectors

The pensions of Evangelical Lutheran Church employees are financed in the same way as the pensions of municipal employees. Although the pay-as-you-go system is in use, a buffer fund is also accumulated to even out pension expenses. The Church Pension Fund is responsible for the tasks associated with financing.

The employment-related pensions of the Social Insurance Institution’s employees are financed from the pension liability fund referred to in the Act on the Social Insurance Institution.

Pensions in the other public pension systems, such as those defined in the Act on the Orthodox Church and the Act on the Employees of the Government of Åland as well as the pensions defined in the pension guidelines of the Bank of Finland, are financed according to principles similar to those in other Acts on public pensions.