Earnings-related pension system: key words and terms explained

A

Accrual of a pension

Accrual of a pension means the amount of earnings-related pension that accrues yearly from earned income.

As of the beginning of 2017, the yearly accrual rate in all age groups from the age of 17 onwards is 1.5 per cent of the income forming the basis of the pension. The accrual of a pension is also the same for work done during retirement.

The above notwithstanding, the yearly accrual rate is 1.7 per cent of income between the ages of 53 and 62 years until 31 December 2025 (increased accrual during a transition period).

As of the beginning of 2017, pensions accrue on all wages, and the earnings-related pension contribution is no longer deducted when calculating the accrual of pensions.

Accrual rate

The accrual rate is a percentage that indicates how much earnings from work increase the pension.

A uniform accrual rate of 1.5 per cent was adopted for all age groups as of the beginning of 2017. However, between the years 2017 and 2025, the accrual rate for people from 53 to 62 years of age will temporarily be 1.7 per cent.

The accrual of pension is calculated simply by multiplying the annual wages by the accrual rate.

The accrual rate for the projected component, associated with disability pensions, is also 1.5.

Acts on earnings-related pensions

The following acts apply to earnings-related pensions

  • TyEL – the Employees Pensions Act
  • JuEL – the Public Sector Pensions Act
  • YEL – the Self-Employed Persons’ Pensions Act
  • MYEL – the Farmers’ Pensions Act
  • MEL – the Seafarers’ Pensions Act

In addition, there are some other pension acts that concern fairly small groups.

D

Defined benefit pension scheme

The Finnish earnings-related pension system is a defined benefit scheme. This means that

  • the benefit level is determined beforehand
  • the benefit is based on the wages earned and the confirmed income
  • the contributions needed to finance the scheme are flexible, whenever necessary.

A pension scheme is a defined contribution scheme if the benefit level is based on the combined amount of pension contributions and the investment returns obtained on them. In such cases, contributions are generally fixed and the benefit is flexible.

For example, in Switzerland, Poland and Denmark, virtually all employees are covered by defined contribution pension schemes.

Disability pension

A disability pension may be granted if an illness or a disability prevents working.

The disability pension consists of

  • the pension accrued during the work history to date
  • the projected pension component.

The projected pension component refers to the inferred time that a person could have worked before the retirement age if there had been no disability.

E

Earnings-related pension

As of the beginning of 2017, the earnings-related pension begins to accrue at the age of 17 years. Self-employed persons’ pension begins to accrue at the age of 18 years. The pension is formed on the basis of the earnings accumulated during the work history as a wage-earner or as a self-employed person. Some unpaid periods also build up the pension.

Disability pensions and survivors’ pensions are also formed on the basis of the earnings-related pension.

Earnings-related pensions are managed and paid by authorized pension providers, i.e. pension insurance companies, company pension funds and industry-wide pension funds.

The national pension and the guarantee pension paid by Kela guarantee livelihood if the earnings-related pension is small or non-existent.

Earnings-related pension index

Changes in consumer prices and income level are noted in pensions by applying the earnings-related pension index. All pensions are adjusted annually using the earnings-related pension index, where

  • prices have a weight of 80 per cent
  • wages have a weight of 20 per cent.

In 2017, the earnings-related pension index is 2534 (an increase of 0.6 per cent on the previous year).

Earnings-related pension contribution

The earnings-related pension contribution is a statutory insurance contribution used to finance earnings-related pensions.

Pension contributions are paid by private-sector and public-sector employers and employees. The employer insures the employees and deducts the employees’ share of the pension contribution directly from their wages.

Self-employed persons and farmers take out their own pension insurance. They pay their pension contributions based on their confirmed income to their own pension providers.

Effective retirement age

The effective retirement age means the age at which a person retires. The average effective retirement age is reduced, for instance, by young people’s disability pensions.

G

Guarantee pension

The minimum pension provided by a guarantee pension is EUR 760.26 per month (2017). If the pensioner’s other combined pension income falls below this amount, the guarantee pension fills the gap. The guarantee pension is granted and paid by Kela.

A guarantee pension is not paid to a person who receives only a part-time pension, a partial disability pension or a survivors’ pension. In addition, following the pension reform, a guarantee pension is not paid to a person receiving only a partial old-age pension or a years-of-service pension.

The guarantee pension has replaced the special assistance to immigrants.

E

Early retirement pension

Pensions that start before the old-age pension are called early retirement pensions. The early retirement pensions granted as of the beginning of 2017 are

  • disability pension
  • years-of-service pension
  • partial old-age pension.

I

Increase for late retirement

As of the beginning of 2017: If an employee does not use his or her right to an old-age pension, in other words, does not take out the pension, the pension accrued is adjusted by an increase of 0.4 per cent for each month that retirement is postponed after the lowest retirement age. That means an increase of 4.8 per cent per year.

Indices and index increment

All earnings-related pensions are adjusted annually using the earnings-related pension index.

The earnings-related pension index has the following weights:

  • change in prices 80 per cent
  • change in wages 20 per cent

In 2017, the earnings-related pension index has a value of 2534 (0.6 per cent more than the year before).

When determining the amount of a starting pension, pension providers apply the wage coefficient. The wage coefficient is used to raise the wages and confirmed income earned during the work history to the level of the retirement year.

In the wage coefficient,

  • the change in the price level has a weight of 20 per cent
  • the change in the earnings level has a weight of 80 per cent.

In 2017, the wage coefficient is 1.389 (1.2 per cent higher than the year before).

Each year, the Ministry of Social Affairs and Health confirms the indices applied to earnings-related pensions.

L

Life expectancy

Life expectancy means the average number of years a person of a certain age lives if mortality remains unchanged. In Finland, life expectancy is calculated by Statistics Finland.

Life expectancy coefficient

The life expectancy coefficient adjusts the level of earnings-related pensions to the rise in the average life expectancy. The coefficient is calculated each year separately for the age group that reaches the age of 62 years in that year. The coefficient is based on the mortality statistics for previous years.

If the average life expectancy increases, the life expectancy coefficient reduces the monthly pension. This reduction is levelled out by staying in working life longer.

The life expectancy coefficient was adopted in 2010. The coefficient does not apply to age groups born before 1948.

The life expectancy coefficient confirmed for 2017 is 0.96344. It reduces the monthly pensions of people born in 1955 by about 3.7 per cent.

The life expectancy coefficient is decreased when the retirement age for old-age pension is 65 years, i.e. after 2027. The decrease in the life expectancy coefficient applies to both old-age pensions and disability pensions. In addition, the scope of the life expectancy coefficient is extended to cover the projected component of disability pensions.

For old-age pensions, the life expectancy figure for each age group is calculated at the age that is one year under the lowest retirement age for old-age pensions. Disability pensions apply the life expectancy coefficient of the year when the disability pension starts.

National pension

A person who lives in Finland and is at least 16 years old may be granted a national pension.

A full national pension can be obtained if there is no earnings-related pension or it is at most EUR 55.54 per month (in 2017).

In 2017, the full national pension is

  • EUR 628.85 per month for a person living alone
  • EUR 557.79 per month for a person who is married or cohabiting.

The earnings-related pension reduces the national pension: the higher a person’s earnings-related pension, the smaller the national pension.

No national pension is paid when a person

  • lives alone and has an earnings-related pension of about EUR 1,300
  • is married or cohabiting and has an earnings-related pension of about EUR 1,158.

O

Old-age retirement age

See Retirement age in this glossary.

Voluntary pension insurance

Voluntary pension insurance is a pension plan that a private individual usually pays for in its entirety. At the same time, it is a form of long-term saving.

Voluntary pension insurance makes it possible to retire earlier or to have a better pension than the earnings-related pension accrued.

Orphan’s pension

The orphan’s pension is a pension that is paid to a child under 18 years of age if a parent or a provider of the family dies.

P

Part-time pension

Under the legislation valid until the end of 2016, a part-time pension referred to a pension that a person received while working part-time. Employees and the employer had to agree on the start of part-time work and part-time pension.

The part-time pension was replaced by the partial old-age pension as of the beginning of 2017.

Partial disability pension

The disability pension may be granted as a partial pension if the person’s ability to work has decreased by at least two fifths. The amount of the partial disability pension is half of the full disability pension.

Partial old-age pension

The previously available part-time pension was replaced by the partial old-age pension in 2017. A partial old-age pension is available after the age of 61 years until the start of the old-age pension.

If they so wish, employees may take out 25 or 50 per cent of their pension accumulated up to that point. The pension is adjusted using the life expectancy coefficient. In addition, this pension is adjusted using the reduction for early retirement, which is 0.4 per cent for each month. The reduction is permanent, i.e. it also affects the final old-age pension. The requirement concerning part-time work is abandoned and the pension does not involve any monitoring of wages or working time.

The lower age limit for the partial old-age pension will be raised to 62 years as of the beginning of 2025.

Pension

Pension means regular income obtained after the work history. Pension can be an earnings-related pension or a national pension. If the amount of pension is very small, it can be paid as a lump sum at one time.

Pension fund

Pension funds mean assets invested by pension providers. The assets are derived from pension contributions and are intended for paying pensions.

Pension provider

A pension provider manages and pays earnings-related pensions. The pension provider can be a pension insurance company, a company pension fund, an industry-wide pension fund or a sector-specific pension provider.

The administration of the earnings-related pension system is decentralized among many pension providers. Common issues within the system are managed by the Finnish Centre for Pensions (ETK). The Finnish Pension Alliance TELA looks after the interests of insurers providing earnings-related pensions.

Pension record

Pension providers post a pension record every three years to people of 18 to 67 years of age who live in Finland. The easiest way to check the pension record is online. An electronic pension record can be obtained by using bank access codes.

The pension record shows

  • the earnings accumulated to date for calculating the future pension
  • the pension accrued on unpaid periods, e.g. when receiving a sickness allowance, an unemployment allowance or a parental allowance or when studying.

The pension provider that sent the record should be informed without delay if the data in the pension record need to be corrected.

Reduction for early retirement

As of the beginning of 2017, the reduction for early retirement is linked to the partial old-age pension (see Partial old-age pension in this glossary). The pension paid is adjusted using a reduction of 0.4 per cent for each month of early retirement. This makes 4.8 per cent per year. The reduction has a permanent impact on the pension.

Registered supplementary pension

Employers have been able to improve employees’ pension benefits by means of a registered supplementary pension. The registered supplementary pension increases the amount of pension paid or lowers the employee’s retirement age.

New supplementary pensions can no longer be registered, but the old ones have still been in force. The validity of registered supplementary pensions expired completely at the end of 2016. This does not affect the pensions that are being paid. Nor does the expiry affect the amount of the supplementary pension that an employee has accrued before the end of the system.

Rehabilitation

Pension providers offer occupational rehabilitation that prevents disability and improves coping with work.

Rehabilitation of various types may also be provided by

  • Kela and the TE offices
  • hospitals, health centres and municipalities

accident and motor insurance companies.

Retirement age

Retirement age means the age at which old-age pensions begin. As of the beginning of 2017, the retirement age for old-age pensions is raised stepwise from 63 years to 65 years. The lowest retirement age for people born in 1955 is therefore 63 years and 3 months. The retirement age rises three months for each subsequent birth year. Hence, people born in 1962 are the first age group whose minimum retirement age is 65 years.

The goal is to keep the relationship between pension years and working years the same as it is projected to be in 2025. If this makes it necessary to adjust retirement age limits, the next adjustment will be made in 2030. The increase is at most two months per year.

The upper age limit for compulsory insurance will be five years above the lower limit of the retirement age for old-age pensions, calculated in full years. For example, if the retirement age for an age group is 63 years 3 months, the upper age limit is exactly 68 years.

Some central and local government occupations may have

  • an occupational retirement age that is lower than 63 years
  • a personal retirement age that falls between 63 and 65 years of age.

Retirement age expectancy

The retirement age expectancy refers to the age at which a person now aged 25 or 50 years is expected to retire. Thus, it describes the number of remaining working years and the age at which a payer of pension contributions becomes a pension recipient.

The retirement age expectancy, developed by the Finnish Centre for Pensions, also considers disability pensions.

Right to a pension

The earnings-related pension is based on earnings obtained during the work history. Hence, the right to an earnings-related pension arises from gainful employment.

However, the right to a pension does not arise from earnings obtained

  • under the age of 17 years (as of 1 January 2017)
  • after passing the upper age limit for compulsory insurance
  • before the entry into force of the Pension Act
  • below the minimum limit for earnings – in 2017, a pension accrues if the pay is at least EUR 58.19 per month.

S

Self-employed person’s confirmed income

  • The self-employed person’s confirmed income is the annual income that the pension provider has confirmed for the self-employed person’s pension insurance (YEL insurance). The self-employed person pays pension contributions on the income, and these contributions are used as the basis for the accrual of pension.
  • The confirmed income should match the self-employed person’s work input and should correspond to the wages that an outside employee would be paid for the same work.

Social benefit period

A social benefit period refers to periods when a person receives a social benefit that builds up the pension.

Also known as unpaid periods, they refer to periods for receiving, for instance

  • parental allowance
  • sickness allowance
  • unemployment allowance.

Statutory pension provision

Pension laws guarantee

  • an earnings-related pension to employees and self-employed persons who are covered by pension insurance
  • a national pension for people who live in Finland and get only a small earnings-related pension or no earnings-related pension at all
  • a guarantee pension, which ensures the minimum pension if the national pension and other pensions fall short of this
  • a survivors’ pension for the surviving spouse and children if a spouse or a provider of the family dies.

The earnings-related pension reduces the national pension so that, after a certain income limit, no national pension is paid.

Supplementary pension

In addition to the statutory pension, an employer can offer the employees a voluntary supplementary pension. The supplementary pension increases the amount of the pension paid or lowers the employee’s retirement age.

A supplementary pension can be

  • a collective supplementary pension plan
  • a group pension plan
  • a supplementary pension arranged through an industry-wide pension fund or a company pension fund.

See also: Registered supplementary pension.

Survivors’ pension

The survivors’ pension secures the family’s income if one of the spouses or a provider of the family dies. The widowed spouse and children under 18 years of age are entitled to a survivors’ pension.

The survivors’ pension consists of the surviving spouse’s pension and the orphan’s pension. The spouses of a registered same-sex partnership have the same right to a surviving spouse’s pension as a married couple. A surviving common-law spouse is not entitled to a surviving spouse’s pension. The parents’ marital status does not affect a child’s right to a survivors’ pension.

Surviving spouse’s pension

A man or a woman whose spouse has died may be entitled to a surviving spouse’s pension. Under certain conditions, the surviving spouse may receive a pension both under earnings-related pension laws and under the National Pension Act.

The right to a surviving spouse’s pension arises through marriage. A registered same-sex partnership is comparable to a marriage. A surviving common-law spouse is not entitled to a surviving spouse’s pension.

U

Unemployment pathway to retirement

The unemployment pathway to retirement is intended for aged long-term unemployed people. It means that an unemployed person receives additional days of unemployment allowance after the end of the maximum unemployment allowance period of 500 days. The pathway continues until the beginning of the retirement age.

Additional days are possible if the person has worked for at least five years during the past 20 years.

The right to additional days of unemployment allowance is different for different age groups:

  • Those born in 1950–1954 must have reached the age of 59 years before the maximum unemployment allowance period of 500 days runs out
  • For those born in 1955 and 1956, the minimum age is 60 years
  • For those born in 1957 and later, the minimum age is 61 years.

At most, the allowance for additional days can be paid until the end of the month when the person reaches the age of 65 years.

W

Wage coefficient

The wage coefficient is needed for calculating the amount of the earnings-related pension at the start of retirement. The wage coefficient raises the wages and confirmed income earned during the work history to the level in the year of retirement.

In the coefficient,

  • the weight of the change in earnings is 80 per cent
  • the weight of the change in prices is 20 per cent.

In 2017, the wage coefficient is 1.389 (an increase of 1.2 per cent on the previous year)

Y

Years-of-service pension

In 2017, the disability pension was supplemented with a years-of-service pension intended for people over 63 years of age who have a long work history. A long history of strenuous and wearing work (38 years) and reduced work ability may entitle a person to retire on a years-of-service pension at the age of 63 years irrespective of the minimum old-age retirement age in one’s own age bracket.

A long work history means working at least 38 years under pension insurance in circumstances that, with minor exceptions, have been strenuous and caused wear. Such a work history may include maternity, paternity and parental allowance periods for a total of no more than three years.