The financing outlook for earnings-related pensions has improved following Finland’s pension reform, but the future contribution rate under the Employees' Pensions Act (TyEL) has become more uncertain, according to new analysis by the Finnish Centre for Pensions (ETK).

The earnings-related pension system has developed broadly as expected in recent years, with moderate investment returns, people retiring later, and employment among older people increasing.

However, ETK pointed out that the pensions reform, due to enter into force from 1 July, will particularly affect the financing of private-sector earnings-related pensions and allow pension assets to be invested more heavily in equities, which is expected to increase investment returns. 

ETK’s latest long-term projections showed that the financing position of earnings-related pensions is stronger than previously estimated and, in the future, investment returns will play a key role.

The organisation noted that equity returns will be particularly important for the long-term development of the contribution rate.

The projections also assumed higher migration and lower fertility than before.
 
“The financing of earnings-related pensions now appears stronger than in the previous projections,” ETK managing director, Mikko Kautto, said.

“The fact that there is no upward pressure on contribution rates is a significant change compared with earlier baseline projections. A stronger financing outlook for the earnings-related pension system is, in principle, also very positive for public finances.”

The average contribution rate for private-sector employees has been agreed at 24.4 per cent of wages until 2030. In ETK’s baseline projection, the contribution rate will fall to just over 22 per cent in the 2040s and start to rise again around the middle of the century.

ETK development manager, Heikki Tikanmäki, explained that the baseline path for the contribution rate assumes real investment returns of 3.2 per cent at first and 3.75 per cent later.

She added that, in nominal terms, the corresponding rates are two percentage points higher due to inflation.

The Finnish pension reform will also impact the growth of pension assets, according to ETK. Pension assets amounted to €290bn at the turn of the year, and in the baseline projection, they will rise to €1,300bn in today’s money by the end of the century. Relative to pension expenditure, pension assets will almost double by then. 

In 2025, earnings-related pension expenditure in Finland was 33.1 per cent of the sum of earned income. The ratio is projected to fall to just under 28 per cent by the middle of the century, and after that, it will begin to rise again and reach around 35 per cent in the 2080s. 

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