The long-term financing of Finnish pension funds is increasingly reliant on investment returns, according to the Finnish Centre for Pensions (ETK).

It noted that while the long-term pension financial outlook has improved “considerably” due to favourable investment returns, uncertainty around future contribution rates has grown.

It warned that, if birth rates remained low, an increasing share of rising pension expenditure will have to be covered by returns on pension assets.

According to Statistics Finland’s forecast, birth rates will remain low and the working-age population will decline through the years 2021-2090, while the old-age dependency ratio will nearly double during this time.

In recent years, earnings-related pension assets have yielded a better-than-expected return, with pension assets under the Employees Pensions Act predicted to grow and accumulate in the long term.

ETK noted that the private-sector insurance contribution under the Employees Pensions Act (TyEL contribution) can be kept below 25 per cent of wages until the 2050s and while the pressure to increase the contribution rate persists in the long term, it has declined by 4 percentage points since its previous projection in 2019.

It added that the TyEL contribution rate could be kept at 26 per cent of wages at the end of the century if the real return on pension assets was at least 3.5 per cent in the long term.

“We mustn’t stop improving the earnings-related pension system because the improved financial position due to good investment returns masks significant vulnerabilities such as low birth rates,” said ETK director, Allan Paldanius.

During the next 10 years, the real return on pension assets is expected to be 2.5 per cent, after which it is assumed to rise to 3.5 per cent.

A return that is slightly over 1 percentage point higher or lower than in the baseline projection would impact the earnings-related pension contribution level by nearly 1.5 percentage points in 2040.

By 2090, a slightly over 1 percentage point higher return would allow for a TyEL contribution that is nearly 10 percentage points lower than the baseline projection’s 26 per cent.

However, in the low-return projection, the contribution should be raised by 6 percentage points to around 32 per cent.

ETK senior mathematician, Kaarlo Reipas, commented: “Tolerating uncertain returns is an integral part of investing. However, the pension system is well prepared for that because of the long-term nature of investing.”

The average monthly pension in Finland was €1,784 in 2021, with this expected to rise to €1,900 by 2030.

ETK noted that average pensions in payment are around 50 per cent of the average wage, with pensions forecast to grow faster than earnings over the next few years due to inflation outpacing wage increases.

“The ratio of the average pension to the average wage will take a downward turn in the mid-2020s,” ETK stated.

“The main reason for the declining ratio is the life expectancy coefficient, which adapts the benefit level to correspond to changes in life expectancy.”

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