Reforms to the Finnish earnings-related pension system could see equity allocations increase by 10 percentage points, according to analysis by the Finnish Centre for Pensions (ETK).

The social partners’ agreed reforms were concluded on 19 January and have received government approval. Finnish Prime Minister, Petteri Orpo, tasked social partners with making reforms equating to 0.4 percentage points of GDP, around €1bn in June 2023.

The social partners and government ministries began working on the reforms in October 2023, with a deadline of 25 January 2025. The key areas include changes to investment regulations that will allow for more equity investments, the introduction of an inflation stabiliser and additional funding for old-age pensions.

According to ETK’s calculations, the reform strengthens pension financing in the long term. The overall reform would reduce the TyEL contribution by, on average, 1.5 percentage points. Around one-fifth of this improvement will be due to the change in the funding of old-age pensions and one-fourth to the introduction of the inflation stabiliser.

It has also calculated that the proportion of shares within investment portfolios could increase by more than 10 percentage points, while allocations to other investments could decrease. Following these changes, the expected real return for private sector pension assets could improve by around 0.3 percentage points compared to current regulations.

Despite this, ETK development manager, Heikki Tikanmäki, warned that there is “another side to the coin” when investments yield poor returns for a long time. In this case, she said, earnings-related pension contributions might need to be increased more than under current legislation due to the reform.

As agreed, however, the earnings-related pension contribution under TyEL will be stabilised at 24.4 per cent until 2030, while the share of funded old-age pensions will increase.

The new automatic stabiliser – the inflation stabiliser – mitigates the index increases in earnings-related pensions in exceptional situations where consumer prices would develop faster than wages over the two-year review period.

However, ETK noted that age limits and the determination of pension benefits will not change, making this reform different from other pension reforms of the 21st century.

ETK managing director, Mikko Kautto, commented: “The reform responds to the pressure to increase pension contributions caused by decreasing nativity by increasing the role of pension assets and funding. The share of the changes in investment operations and funding accounts for around 70 per cent of the total impact of the reform.”

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