A legislative reform to Finland’s system of earnings-related pension took effect on 1 January 2017. The change will implement a gradual rise in the retirement age by three months per year, from the current 63 years to 65 years.
The change will only affect people born on or after 1955.
The reform eliminates the former ’super accrual’ clause of the previous pension scheme, which granted a yearly 4.5 percent pension increase for every extra year people worked past the official retirement age. In future, if workers wish to postpone their retirement, they will be granted a monthly 0.4 percent increase for each month they continue to work.
Finnish pension firm Varma reports that the phasing out the old accrual plan has caused the most consternation for its policyholders.
“The yearly accrual rate will be replaced with a monthly rate, but people still haven’t understood that the end result is virtually the same in terms of total pension,” says Varma’s product manager Pauliina Hilkamo.
1.5 percent of annual earnings
Starting in 2017 in Finland, the pension accrual rate will be 1.5 percent of annual earnings for people between 18 and 52 years of age.
Both employees and employers contribute to the pension. The employer automatically withholds the share of the earnings-related pension contribution from wages and pays it, together with its own share, to the employee's pension provider.
People who are self-employed are required by law in Finland to pay the contributions themselves.
When people retire, their pension provider pays out the pension. If earnings are low, this pension can be supplemented by a national or guarantee pension paid by the state benefits administrator Kela.
Average 60-year retirement age in 2015
Varma’s Hilkamo says that people on the verge of retirement in Finland often speak of having a ’high-quality third phase of life’. In practice, this has meant that people keep close track of their pension accrual so that they can travel, for example.
According to the Centre, the average age for starting retirement in Finland in 2015 was 60.7 years old, and the median age was 63.1. One of the objectives of the reform is to see this average rise to 62.4 years of age by 2025. It would follow a general trend, as the average age people stop work and start collecting pension has been steadily rising in Finland.
New partial old-age pension system
Part-time retirement was a very popular option for years, with over 700 applications annually, but the number of people choosing to work part-time before retirement has also been in steady decline.
As of 2017, the part-time option will be replaced with what is being called a partial old-age pension. Under this new system, people can start partial retirement already at 61, at which time they will be able to take out 25 or 50 percent of the pension they’ve earned.
If people choose to retire early under this new plan, they will be penalized with a 0.4 reduction for each early month. In other words, if they take out part of their pension one year yearly, that part will be reduced by 4.8 per cent.
For people born after 1965, retirement age will be linked to life expectancy in future. Each age group will be appointed a target retirement age, slightly higher than their normal retirement age, five years before they are expected to retire.
Drastic reduction in disability pensions
The number of people applying for disability pension in Finland has also fallen dramatically in the last few years. Varma’s Chief Physician Jukka Kivekäs says applications have dropped by about a quarter since 2008.
“There are many reasons behind it: work places are now managed better and help people find new jobs. Occupational health services have also been instrumental in supporting workers in their profession and rehabilitation,” he says.
Kivekäs says each new generation is also healthier and lives longer than the previous one.
Report predicts people will work longer
The Centre’s 2015 report on the reform predicts that the government reform will succeed in postponing retirement, mainly due to the increases in the retirement ages.
As a result, working lives will be extended, employment will improve and the number of retirees will grow more moderately. The report also forecasts a decrease in the annual earnings-related pension expenditure relative to the insured earnings in the short and medium-term.
The report forecasts that the average pension payments in Finland will likely increase as a result of the extended working years and the mitigated life expectancy coefficient.
The Finnish Centre for Pensions has created a brochure in English on the pension reform that contains more details.