Earnings-related pension insurance constitutes an element of statutory social security in Finland. The system is benefit-based; in other words, the content of pension provision is defined by law. Most of the money needed for paying pensions comes from the pension contributions collected from employers and employees each year. Some of the pensions paid are financed by returns on investments.

Returns on investments accumulate because one quarter of the pension contributions collected is funded for future pensions. In this way, pension contributions remain permanently lower even though the population is aging. The pension assets collected through pension contributions are intended only for managing the statutory pension provision. The purpose of the investments is to support the long-term sustainability of the system.

Decentralized implementation

The implementation model of the Finnish earnings-related pension system is different from the models used elsewhere in the EU. In Finland, the earnings-related pensions of the private sector are managed in a decentralized manner by several pension insurance companies, company pension funds and industry-wide pension funds, which compete against each other. The public sector has its own institutions for pension provision. Decentralized implementation has several benefits:

  • competition between actors improves efficiency and keeps the system’s operating costs low
  • policyholders (employers and self-employed persons) and the insured get better service
  • services can be differentiated to meet the needs of different policyholders
  • the risks of implementation are spread; however, the pension providers bear joint responsibility in the event of bankruptcy
  • investment risks are spread
  • the various investment strategies of pension providers also benefit the Finnish capital market

Tripartite preparation guarantees the development of the system

Finnish earnings-related pensions are covered by insurance premiums collected from employers and employees. Thus, unlike in many other EU Member States, no annually collected tax revenues are used for that purpose. However, the State participates in the financing of pensions paid by virtue of the Seafarer’s Pensions Act and in the financing of pensions paid to self-employed persons and farmers.

The financiers of earnings-related pensions – employers and employees – play a central role in the development of the earnings-related pension system. The contents and financing of earnings-related pension provision have been developed in negotiations among the social partners for as long as the system has existed. On the basis of comments made by the central labour market organizations, the Ministry of Social Affairs and Health prepares proposals for amending the legislation on earnings-related pensions. This method is known as tripartite preparation. The actual decisions on legislation are made by the Finnish Parliament.

Tripartite preparation has helped to ensure that the financing of the earnings-related pension system has remained on a sustainable foundation despite the fact that the population is ageing and Finns live longer. It has also been possible to adapt the contents of pension provision to changes in work life.