Finland is facing a rapidly ageing population as well as the challenges of the fast evolving digital global markets. Under Finland’s state-sponsored pension scheme, working people and their employers must invest some 23% of gross salaries into the big worker’s pension funds. Around two thirds goes to future pensions and one third is paid out as current pensions to those who have already retired.
More reforms are needed. Even though the retirement age has been lifted by successive governments there are still too many who think that they can retire early and expect others to pay their pensions. At the same time, the pension companies have become emboldened to ask employers and employees to pay a little more to cover the current and future pension costs.
By law, most working Finns have paid around their 5% from their salaries into the pension pot while employers are required to contribute a little under 20% on top of each worker’s salary. Other folk who have not worked long enough or not at all receive a meagre state pension.
Unfortunately this ageing population and the current fall in the birth rate means that there are fewer people working in relation to the total of current and future pensions, and because of that the pension companies are now again demanding that the workers should start to contribute more cash into the system.
There are 5 big pension bodies of which 3 are so-called “private pension insurance companies” and 2 are public – the State Pension Fund and the Local Government Pension Institution. The so-called private companies, Ilmarinen, Varma and Elo, have been created under this same legislation and are run as if they are private, but in reality they operate under an implicit state guarantee.
Increased contributions from working folk are definitely not the best way to handle the future deficit. In fact it is just a way of allowing the pension companies and their stakeholders to continue paying huge salaries and other benefits, as well as running highly costly and inefficient investment systems.
Their inefficiencies are well-known and have been reported elsewhere. The pension companies operate around a lobbying barrier of self interest that has protected them from necessary radical reform:
- Many of the senior management of Finland’s biggest companies sit on their boards.
- They have the main trade union leaders also sitting on boards and committees that run into hundreds of positions in just 3 companies!
- The renumeration for their senior managers runs into six and even seven figures.
- The annual payments to the board and committee members range from €20 000 to over €100 000 even when they have no financial or investment expertise. Not one of the pension bosses has ever worked in a senior position abroad, so there is little or no justification for such high salaries.
The present system can best be described as being such that the political and commercial interests of pension companies and trade unions is diametrically opposed to those of the workers and retirees. The bosses extract favourable rents, deals and renumeration and the pensioners get what is left over.
The investment portfolios are also basically duplicated with excessive amounts invested in low-earning real estate and government bonds while too little is held long term in equities. They also have been lending money to their corporate clients which also produces low returns.
Then there is the matter of how they manage the funds. Large parts are outsourced to outside fund managers who reap in big fees. This activity is being monitored by in-house fund managers of the pension funds who travel the globe to meet with their fund managers. Given that they have largely replicated similar strategies, and given that they are individually rather small as international investors, there would be enormous saving by putting the 3 funds into one state-controlled fund with huge resources like in Singapore or Norway. Size is an important cost-reducing factor and state control can clearly be as efficient as these semi-public ones! The public funds have produced higher returns with much less management and administrative costs
The cost reduction could be in the order of 1% or more – this is a number the 3 pension funds dispute but examination of the numbers reveal that to be a minimum. A reduction in their unproductive administration, a reformed investment policy and a huge reduction in the head count of expensive senior management and administration will produce a much higher annual improvement of more than 1% to the pension fund. That fact is indisputable given the performance of the main equity markets this last decades.