Competition in the sector of earnings-related pensions
Employers and self-employed persons in the private sector have the opportunity to select how they organize their employees’ or their own earnings-related pension insurance. The company, where possible, may establish its own pension fund, join an existing industry-wide pension fund, or become the customer of a pension insurance company of its choice. The latter two ways are possible for self-employed people. Thus, authorized pension providers in the private sector compete with each other over customers.
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Legislation both restricts competition and requires cooperation
Because authorized pension providers in the private sector compete with each other over customers, they are in principle subject to competition legislation. Competition legislation protects sound and effective economic competition from harmful restrictions.
On the other hand, earnings-related pension legislation allows insurers to carry out necessary cooperation in the field of social security. In line with earnings-related pension insurance legislation, authorized pension providers must cooperate
- in the preparation of insurance terms and actuarial principles;
- in the compilation of statistics; and
- in other matters pertaining to the implementation and development of laws concerning earnings-related pensions.
However, competition may not be restricted any more than is needed to discharge the duties prescribed in earnings-related pension insurance legislation. With regard to competition among pension insurance companies, both the Finnish Competition and Consumer Authority (KKV) and the Financial Supervision Authority have adopted an “interpretation line for coordination” which allows cooperation and restriction of competition whenever necessary for social security, but emphasizes the importance of competition and diversification where it suits the nature of social security. In the view of the Financial Supervision Authority, it follows from the “interpretation line for coordination” that – in the current earnings-related pension system – the requirements of competition law are subordinate to the requirements of social security.
Competition law prohibits undertakings operating in the same line of business from disclosing information comparable to business secrets to their competitors. Thus, pension providers must take this fact into account when implementing the cooperation required by earnings-related pension legislation.
Limited means of competition
Because the operations of pension providers are statutory and strictly regulated, there are limited means for competition between operators. All pension providers have the same product, i.e. the pension benefit, which is based on legislation. It is therefore impossible to compete on the product; instead, the content of the pension coverage is the same for all employees and self-employed persons, regardless of how the pension coverage is organized.
Competition between actors must never jeopardize the basic task of the earnings-related pension system, which is to safeguard earnings-related pensions.
Pension providers can compete for instance over the quality of customer service and different service solutions, targeting both customer companies and the insured. In addition, some pension providers specialize in earnings-related pension insurance in certain sectors, enabling them to offer their special expertise to clients.
Competition between pension insurance companies and company pension funds/industry-wide pension funds takes place at the level of pension contributions. Although the average pension contribution is the same for all actors, in practice it depends on whether the earnings-related pension insurance is arranged with a pension insurance company, a company pension fund or an industry-wide fund.
Effect of the pension provider on an employer’s pension contribution
The average level of earnings-related pension contributions in the private sector is agreed between the labour market organizations. Part of the contribution is collected from the employee and the rest is the employer’s responsibility. However, the contributions of individual employers may vary depending on whether the employer has taken out the earnings-related pension insurance with a pension insurance company, a company pension fund or an industry-wide pension fund.
Pension providers may differ in the levels of pension contributions they charge. From 2023, each pension provider independently sets its expense loading component, which is included in pension contributions and intended to cover the pension provider’s operating costs. This will affect the overall level of pension contribution charged by the provider.
In addition, the client companies of pension insurance companies may be granted a discount on the pension contribution through a company-specific customer rebate. Customer rebates are a surplus distributed among the customers of pension insurance companies. The rebates accumulate from investments.
The employer who has established a company pension fund or all employers who have established an industry-wide pension fund together determine the size of the pension contribution according to the expenses of the pension fund. The contribution collected from employers is determined so that, together with investment returns, it is sufficient to cover the fund’s expenses. If the fund’s financial situation and solvency are at a sufficiently high level, it may be decided during the year to collect less or not to collect these contributions at all. Similarly, the fee may also be higher if the financial condition of the fund so requires.
Competition aims at increasingly efficient implementation
The goal of competition between authorized pension providers is to enhance the efficiency of implementation, improve services and increase the returns on investments. Thanks to the returns on investment assets, the level of the earnings-related pension contribution can be kept lower than it should be on the basis of the pension expenditure. When there are several actors, investment of assets does not depend only on one view. In this way, investment risks are better managed.
Competition benefits both policyholders, i.e. employers and self-employed persons, and the insured, i.e. employees.
Transfers illustrate competition between pension insurance companies
Competition between pension insurance companies can be illustrated by so-called transfer statistics. The customers of pension insurance companies, i.e. employers and self-employed persons, have the opportunity to transfer their earnings-related pension insurance policies from one company to another. A prerequisite for the transfer is that the policy has been with the same company for at least one year before the transfer.
It is possible to make insurance transfers from one pension company to another four times a calendar year. We always publish transfer statistics on our Transfers of policies page after each transfer round.