In Finland, statutory earnings-related pensions are mainly financed using the pay-as-you-go system. This means that the pensions for each year are financed from the pension contributions collected during the same year.

However, the private sector has a partially funded system where some of the pensions are financed by the pension contributions collected during the current year and some by assets deposited earlier in funds. These assets deposited in funds constitute the pension provider’s technical provisions.

The pension provider calculates the technical provisions for each insured individual (an employee) and pensioner insofar as the pension provider has put assets into funds in advance for their pensions. Technical provisions are determined so that they will be sufficient, on average, for paying the funded part of the pension. More information about the determination of technical provisions is available on our page ‘Calculation of technical provisions’.

The assets funded must be invested profitably and securely to ensure sufficient assets for the payment of future pensions. Profitable investments can also relieve the pressure to raise future pension contributions.

Solvency describes the capacity to bear risks

The pension provider’s solvency describes the pension provider’s capacity to bear risks: what is the pension provider’s capacity to cope with risks encountered by pension insurance activities. Risks are an inherent element of earnings-related pension insurance, and they may pertain to both investment and the actual insurance activities.

In investment, high returns and a low risk level are contradictory goals by nature: the greater the investment risks are, the higher are the returns that may be obtained. The risks of insurance activities, in turn, stem from the fact that it is impossible to know in advance precisely how Finns will retire on pension in the future. For instance, the numbers of old-age and disability pensions commenced vary from year to year. Thus, the amount of pension benefits payable each year cannot be known exactly in advance.

Solvency is measured by determining the pension provider’s assets that exceed the technical provisions. If the assets invested exceed the technical provisions by a sufficient margin, the pension provider is solvent.

Certain common rules have been set for solvency. Compliance with these rules is monitored by the Financial Supervisory Authority. The rules are used to determine the risk level permitted for the investment of earnings-related pension assets. They also provide the framework for the returns set as a target for investment activities.

The regulations on solvency only pertain to private-sector pension insurers, i.e. pension insurance companies, company pension funds and industry-wide pension funds.