The Finnish Pension Alliance (Tela) has warned that the proposed reform of Finland's Self-Employed Persons' Pensions Act (YEL) does not achieve the government's objectives and should be amended before it is considered by parliament.

Responding to the government's consultation on the proposals, Tela CEO, Saara-Sofia Sirén, said the reforms would increase the complexity and costs of YEL pension insurance.

The alliance highlighted two key areas it believes require change: the need for more up-to-date earnings data to calculate YEL contributions than the government's proposal currently provides, and faster progress towards introducing pension funding through a reform that does not continually increase the financing gap for self-employed pensions.

Sirén said changes to the proposal could strengthen both pension security for entrepreneurs and the long-term sustainability of the YEL system.

"In its current form, the proposal does not achieve the government's objectives of ensuring pension contributions follow entrepreneurs' circumstances flexibly and as up to date as possible, while also simplifying pension insurance administration for entrepreneurs. The proposal should still be improved during the legislative process, so the reform achieves its intended goals,” she stated.

She noted that Tela and Finland's pension insurers agree that one of the most important areas for improvement is the use of real-time earnings information.

Under the current proposal, contributions would be calculated based on taxable earnings confirmed by the tax system, which may be almost two years old. Sirén argued this does not reflect fluctuations in entrepreneurs' income and therefore would not deliver the intended benefits for self-employed workers.

Instead, the pension insurers have proposed that, where possible, pensionable earnings should be determined using real-time data from Finland's Incomes Register.

This would apply to limited companies and certain general and limited partnerships where entrepreneurs pay themselves a salary. For sole traders, more up-to-date earnings data could be introduced later, once the Finnish Tax Administration's centralised business income information system is completed.

The pension insurers acknowledged that implementing this approach would require a longer implementation and transition period than currently proposed.

Tela also raised concerns about the proposed model for determining pension contributions.

Under the government's proposals, entrepreneurs would be able to choose between two methods for calculating their contributions: taxable earned income or an overall estimated earned income model similar to the current system.

The proposal would introduce a new minimum earnings threshold within the estimated income model, requiring pensionable earned income to equal at least 50 per cent of self-employment earnings after a transition period.

However, pension insurers argued that the earnings component should be set at 50 per cent immediately, without a transition period, before being increased further over time.

Sirén said the more closely the YEL system is linked to entrepreneurs' actual earnings, the more transparent and easier it would be for entrepreneurs to understand, while also strengthening the system's long-term financial sustainability.

She also argued that the reform should be assessed from the perspective of public finances.

According to the government's own impact assessment, the proposals would immediately increase the state's contribution to the YEL system by around €100m, on top of the current annual contribution of approximately €600m, with costs continuing to rise well into the 2060s.

She said the reform should reduce, rather than increase, the system's reliance on state funding over the long term.

The alliance also warned that the proposals could undermine future opportunities to introduce pension funding into the YEL system. Unlike Finland's employee pension system, YEL does not currently have funded pension assets, leaving its financing more vulnerable over the long term.

Sirén said preparations for introducing funding should begin immediately if policymakers want to strengthen the system's long-term sustainability, adding that increasing dependence on state funding would make establishing such a system more difficult.

Tela noted that Finland's pension insurers have previously proposed several options for gradually introducing funding, which are outlined in the annex to the government's YEL review.

The alliance also called for the lower threshold for compulsory YEL insurance to be reviewed, arguing that the current limit excludes many part-time, freelance and small-scale entrepreneurs from the system.

It said lowering the threshold would strengthen both pension protection for entrepreneurs and the system's funding base.

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