Finnish Workers’ Pension System Needs Reform

The Finnish workers’ pension system is a stable government-controlled and supervised joint system that covers present and future pensions for every working person here. It is based a collection of national laws and regulations whereby employers and employees each contribute a fixed percentage of workers’ wages each month to several designated private and public pension bodies which then invest the funds until the worker is legally entitled to retire. After retirement the pension bodies start to pay the pension directly to the workers’ account.

This joint system was created in the 1960s by legislation in very different economic circumstances than today. This pension system is clearly in need of urgent need of reform since it is expensive and outdated. The largest private pension bodies and their immediate stakeholders have created protective barriers to competition and refuse to acknowledge that the international investment markets now offer solutions that are much more cost-efficient and that these can best be enjoyed by merging the designated pension bodies into a single public system as in Canada, Singapore and Norway.

This has been discussed in a government sponsored report by two leading researchers, Mr. Tarmo Valkonen and Mr. Jukka Lassila, from ETLA, (a private, non-profit economic research institute) that points out that large cost savings can be achieved by merging the above-mentioned pension bodies into a single public body:

The position of future generations will deteriorate if the tax rate and indebtedness continue to rise. We have studied extension of careers from the beginning and end by shortening study periods and postponing the retirement age and streamlining the investment policy for pension assets. All these measures could strengthen public finances. In addition, we investigated whether the intergenerational income distribution can be balanced by linking pension funding to birth rates…

“…In Finland, the administration of (these) pension funds is decentralized to several (pension bodies). As these institutions are jointly and severally liable for pensions, solvency rules are needed to limit the risk-taking of individual institutions. This makes long-term investment difficult.

Their report states that the loss of income caused by these solvency rules was considered in an assessment of the administration of the Finnish pension system by Adjunct Professor of Finance Keith Ambachtsheer, (a Director Emeritus, Rotman International Centre for Pension Management, University of Toronto), who wrote in his report: “For example, assigning a return-seeking Mandate to the entire €150 billion … could reorient its current solvency-driven ‘short-termism’ and arguably increase its expected return by 1% p.a., or €1.5 billion each year.

The two Finnish authors thus proposed to merge the pension bodies into a single pension institution:

The reform would be purely administrative. It would be very simple, for example compared to (recent) Health- and Social-care Reform (SOTE), if the powers of the new institution could be agreed upon. The Canadian Canada Pension Plan Investment Board (CPPIB), has been chosen here, for example, because it is a (public) institution with an independent investment policy and isolated from political decision-making. 

…it is assumed that the private sector occupational pension scheme will move to a single pension institution model such as the Canadian CPPIB. In the simulation, the return of private sector occupational pension funds is increased by 2.4% p.a. compared to the basic calculation, ie by the amount by which the returns of the Canadian fund have been higher than in Finland in 1997–2020. This measure is proving to be very powerful.

They conclude that the current Finnish legislation could ensure that such a new pension institution could well be managed by “representatives of policyholders and insured persons selected from among persons nominated by the main central organizations representing employers and employees”.

Their conclusions have been supported by a leading Finnish economist and a former senior civil servant at the Ministry of Finance, Mr Sixten Korkman, and by Mr. Mikael Pentikäinen, the head of the Finland’s Entrepreneurs Association. They both underline the fact that cost savings and better risk management from a larger more efficiently managed pension body would bring in hundreds of millions of savings each year and these are certainly low hanging fruits for the government and for all taxpayers in Finland.

These reports and articles have been trampled on by the private pension lobby. They have rejected outright the conclusions by the above independent experts claiming that their shareholders and stakeholders decide on any mergers – whatever that means…

The lobby further states that they do not agree with conclusions on how the current solvency rules reduce returns… They appear to justify their position by saying that the private pension companies follow the same solvency rules as the public sector pension funds apply voluntarily. It is impossible to understand this reasoning and whatever the implication it appears that they believe that the Canadian system is somehow more risky or inferior even though it clearly earns a higher return…

The lobby’s final argument states that it is ironic that Mr. Korkman, (and the two reports he supports) is suggesting such a reform when international comparisons commissioned by these pension bodies state that the present workers’ Finnish pension system is “outstanding…” Naturally you will receive nice reviews when you pay for them!

Ignoring some of the best independent experts is costing workers and pensioners in Finland a pretty penny with the present system. It certainly is time to reform this outdated system, that feathers the bed of a few vested interests at a cost to all hard-working taxpayers.

Photo from CPPIB

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