Statutory pensions in the hands of the EU Member States
Finland’s membership of the European Union is also important to the earnings-related pension system. Although the EU has no decision-making power over earnings-related pensions, the Union has an impact on pensions, for example, through the Regulation on social security coordination, economic coordination and the single currency, the euro.
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Very limited jurisdiction for the EU in statutory earnings-related pensions
The EU Member States themselves can largely decide how the statutory earnings-related pension provision is organized and what the contents of the pension benefits are. The EU therefore cannot pass laws that would interfere with the decision-making processes of individual Member States or the contents of pension provision and other social security.
Since the Finnish earnings-related pensions are statutory social insurance, they are governed by the EU Regulation on the coordination of social security systems. The purpose of the Regulation is to coordinate the social security rights, such as earnings-related pensions, of EU citizens moving between Member States. In practice, the coordination regulation makes it possible to move from one Member State to another without loss or duplication of statutory pensions. Pension accruals are maintained when moving from one country to another, and pensions are paid to all EU and EEA countries and Switzerland.
Impact of pension systems on general government finances
In the EU, statutory pensions are included in general government finances and social security funds. Therefore, both in Finland and in other EU Member States, the pension system and its features are of great importance for general government finances. Pensions are an important part of social security and thus a major item of expenditure, and each country’s pension policy has a significant impact on the labour market. Challenges have been or are being caused by both an ageing population and problems with the sustainability of general government finances.
Following the financial crisis of the late 2000s, the EU tightened its economic coordination. Strengthened economic coordination has also affected Member States’ pension policies. Although the EU’s legislative competence does not directly extend to the provision of statutory social security pensions, the EU has the possibility to guide Member States to make pension reforms through the regulation, supervision and coordination of general government finances, as well as through economic coordination.
Economic coordination became more binding in the 2010s, but towards the end of the decade, flexibility was also sought within the sphere of economic rules. In the late 2010s, social issues, such as questions pertaining to the adequacy of social security, also rose to the EU development agenda.
A well-functioning euro area to support pension investment
From the perspective of the investment of earnings-related pension assets, the EU and the single currency, the euro, are also important.
Pension providers invest part of their pension contributions in international financial markets and domestic destinations. About 40 per cent of the assets have been invested in Finland and other euro area countries. The smooth operation of the financial system in the euro area supports the investment of earnings-related pension assets. In addition, decisions taken in the EU, and those not taken, affect the development of national economies and financial markets.
The euro is important in reducing the investment risks of pension funds. Thanks to the single currency, investing in the euro area does not involve exchange rate risks. When investing outside the euro area, pension providers have to exchange euros for other currencies and back for euros to pay their pensions. Currency exchanges and changes in exchange rates have an impact on investment income.
The euro has also proved to be an important factor in maintaining price stability for earnings-related pensioners. Compared to the Finnish Markka period, the purchasing power of the pension euro has remained stable. Centralization of the single currency and monetary policy has kept inflation in the euro area lower.
Different pensions and different sets of pension provision for each country
The pension systems of countries may differ from each other markedly. In each EU Member State, pension systems have been built on strongly national choices and circumstances.
In Finland, statutory and earnings-related pension providers play a key role in providing a comprehensive and adequate old-age livelihood. Elsewhere in Europe, there is more reliance on employer-specific and trade-specific pensions, where benefit coverage and consistency are generally lower.
Supplementary pensions are also often seen as an important part of citizens’ pension provision in EU-level pension policies. Supplementary pensions are employer-specific and trade-specific as well as privately saved pensions. In Finland, the importance of supplementary pensions is smaller than in many other EU Member States.
The pension systems of various countries are described in more detail on our page Pension systems in different countries.