Measures to reform pension system agreed

The Finnish social partners agreed in January 2006 on new rules governing the investment of earnings-related pension funds. The funds are to invest more heavily in shares in a bid to achieve higher returns and thus ease the upward pressure on pension contributions. In return for accepting the higher levels of investment risk associated with shares, trade unions are likely to be granted more power in the management of the funds. The overall pensions pool is set to grow as a result of the investment changes but the Confederation of Finnish Industries (EK) argues that this is not enough, calling for pension contributions to be frozen at their current level.

The Finnish pension system has gone through major reforms in recent years as efforts have been made to cope with the cost of an ageing population. A key milestone was January 2005 when new rules on pension accrual came into force; by mutual agreement, the social partners and the government decided to cut the overall level of future pensions while increasing the rewards for workers who stay in employment longer (FI0403203F). Thereafter, two tripartite committees have been working to further reform the system; one to change the rules that govern the investment of the money tied up in the earnings-related pension funds; and the other to review the representation rights of trade unions and employers’ organisations in the management of the funds.

The earnings-related pension funds are part of the Finnish pension system, which is a mix of private sector provision and public sector regulation; employers and workers are required to pay monthly contributions to one of the several competing private pension funds, many functions of which, including investment patterns, are statutorily regulated. The social partners hold seats on the boards of these funds, which form the second largest concentration of capital in the country after the Finnish state.

More investments in shares

The tripartite working group which was charged with reforming the investment rules for earnings-related pension funds announced its unanimous recommendations in January 2006. Its primary proposal was that legislation should be changed to allow the funds to invest more heavily in shares, increasing the current permitted average of 25% of all investments in shares to 35%. The group expects that, based on current rules and expected returns, pension contributions would be 6.5% higher in 2030 than they are today because of the ageing of the population. The increased investment in shares would cut the rise by 1-2 percentage points, the group argues. Currently, the level of pension contributions is about 22% of wages; out of this, the contribution of workers is 4-5 percentage points, while the rest is paid by employers.

To control the higher investment risk that comes with increasing the investments in shares, the group proposed the creation of larger 'buffer funds' within the earnings-related pension funds. In addition to this, unions have demanded more power on the boards of the funds, on the grounds that their members’ future earnings are at stake when the level of risk increases. The separate tripartite committee working on this issue is to finish its work in February 2006 and media reports indicate that it will probably yield to the union demands in return for their support of the new regulations. According to Seppo Junttila, the general secretary of the Finnish Confederation of Salaried Employees (Toimihenkilökeskusjärjestö, STTK), who represented his organisation in the committee on investment rules, unions were compensated in this way by giving them 'sufficient reassurance' that their position in the pension funds will be strengthened.

The committee on investment regulations was also to decide on whether the funds could increase their investments specifically limited to Finland in order to create new jobs. Such proposals had been put forward by unions, which have lamented the fact that Finnish companies’ investments in Finland have been nearly stagnant in recent years while they have expanded their operations abroad (FI0509204F). The committee did not endorse any changes in current investment rules to this end. Furthermore, it insisted that, when investing in Finnish stock, the funds cannot specify where the relevant companies are to locate their operations.

EK demands further changes

For the employers’ central organisation, the Confederation of Finnish Industries (Elinkeinoelämän keskusliitto, EK), the expected rise in pension contributions will not be adequately curbed by the agreed measures, and it sees any rise in the contributions as being detrimental to Finnish companies’ competitiveness. In mid-February 2006, EK published a report in which it outlines its labour market-related goals for 2006. Included are the following proposals on further pension reform:

• investments in shares by earnings-related pension funds should be further increased;

• the proportion of capital that the funds are allowed to invest should be increased when necessary;

• the higher pension accrual rates for older workers that came into force in January 2004 need to be lowered;

• the pension contributions of older workers need to be raised;

• part-time pensions should be lowered; and

• pension contributions overall need to be frozen at their current level.

Commentary

Finland is one of the few EU Member States in which a major pension reform cutting the level of future pensions was carried without much opposition and with the backing of unions. The agreement by the social partners over the new investment rules for earnings-related pension funds is a logical continuation of the reform process, in that it further reduces the upward pressure on pension contributions.

It is somewhat surprising that EK chose to call for yet another round of reforms to the pension system in February, only a couple of weeks after the previous ones were decided upon. Its demands are very profound; to freeze pensions at their current level, even when combined with other reforms to the system, would mean a major reduction in the level of future pensions. However, EK’s demands could possibly represent only a 'pre-emptive strike'; the Finnish pension system has of late been deemed by experts as one of the best in Europe in its preparedness for the ageing of the population. Such evaluations could easily lead to trade unions demanding improved benefits, in the absence of strong countervailing arguments. (Aleksi Kuusisto, Labour Institute for Economic Research)