The Finnish earnings-related pension system differs markedly from the systems in use in many other EU Member States. One difference is that in Finland all employees and self-employed persons are entitled to statutory earnings-related pensions.

In Finland, the earnings-related pension is the principal source of income during the retirement years. We believe that this should be the case in the future as well. Supplementary and voluntary pension arrangements are also available in Finland. However, they play a much smaller role than in other EU Member States.

The implementation model of the Finnish earnings-related pension system is also different from those used elsewhere in the EU. In the private sector, earnings-related pensions are managed in a decentralized manner by several competing pension insurance companies, company pension funds and industry-wide pension funds. Competition ensures more efficient implementation. The public sector has its own institutions for pension provision. Another difference is that the private pension providers do not seek profit but work to secure earnings-related pensions.

The financing of pensions is also carried out differently from many other countries. In Finland, some of the earnings-related pension contributions are funded. The returns on the invested funds ease the need to raise pension contributions and serve as buffers for the payment of subsequent pensions. Thus, pension contributions remain permanently lower than in countries where contributions are not funded.

In most other EU Member States, pensions have not been funded and their costs are covered by taxes and fees collected annually. In consequence, the recent economic crisis has put earnings-related pension schemes to a real test in many EU Member States, especially as the European population is ageing at the same time as life expectancies are rising. In Finland, provision for the future has been made not only by funding pension contributions but also by adopting the life expectancy coefficient. This helps to adjust the future pensions as people live longer. Thus, in the European and global comparison, the Finnish earnings-related pension system rests on a very solid foundation.

This uniqueness must be maintained within the EU

Agreement on the status of the Finnish earnings-related pension system was reached back in 1995 when Finland joined the EU. In addition, the social security aspect of the Finnish earnings-related pension system has been recognized on several occasions, for instance, when passing various Directives. The Finnish earnings-related pension system therefore has an established and recognized status within EU law.

Our earnings-related pension scheme is part of the statutory social security system. In consequence, earnings-related pension insurance has not been opened for international competition any more than any other form of social security. We believe that this principle should be adhered to in the future as well.

One of the basic tenets of the EU is the free movement of goods and services. Insurance undertakings are therefore entitled to carry out their business anywhere in the EU and, correspondingly, policyholders are entitled to take out a policy in an insurance company operating anywhere in the EU. Provision of earnings-related pension insurance in Finland is not governed by this rule.

The Finnish earnings-related pension is insurance but it is statutory and mandatory for all companies operating in Finland. A competing product cannot be chosen. The benefits of earnings-related pensions are laid down by law. Moreover, the actors operating the system are jointly and severally liable in the event of bankruptcy. It was therefore agreed in Finland’s treaty of accession to the EU that the EU legislation on life insurance is not applied to Finnish insurance companies providing earnings-related pensions.

This differs from the practice applied to other EU Member States. A precondition was that earnings-related pensions were separated from other insurance operations. This is what was done in the Act on earnings-related pension insurance companies, which entered into force in 1997. Foreign operators are also free to come to Finland and establish an earnings-related pension insurance company here or to acquire a company that is already in business here.

We believe that Finland should maintain the established position of the earnings-related pension system in relation to the insurance regulation carried out by the EU. It should, however, be noted that this position does not apply to any other EU legislation. Pension providers are therefore governed, for instance, by the EU legislation on competition. Similarly, the EU rules on the financial sector, such as investments, impact on pension providers.

Very limited jurisdiction for the EU in earnings-related pensions

Matters pertaining to the way in which statutory earnings-related pensions are arranged and the contents of earnings-related pension benefits are not included in the EU’s jurisdiction. The EU therefore cannot pass laws that would affect the contents of pension provision and other social security in individual Member States. In consequence, the EU’s pension policy mainly consists of recommendations and exchange of information and the steering of the Member States’ pension policy using non-binding means. The term used here is ‘open method of coordination’. It refers to common objectives at the EU level and national plans for reaching these objectives. Various indicators are used to monitor the attainment of these objectives.

The earnings-related pension systems and their economic sustainability play an important role for public finances in all European countries. In effect, the economic crisis and the sustainability problems of public finances have made pension policy part of the EU’s financial coordination. Financial coordination, in turn, is become increasingly binding. Although the EU’s jurisdiction does not encompass the arrangement of statutory earnings-related pensions, the EU can use financial coordination to pressure Member States to adopt pension reforms so that their public finances can be made consistent with the criteria in the EU’s financial agreements.

We believe that Finland should ensure the national independence of decision-making concerning the statutory earnings-related pension system, also in relation to the EU’s more stringent economic coordination. This is best achieved by ensuring the financial sustainability of the earnings-related pension system and by seeing to it that the system will contribute to the stability of public finances.