Proposal for Content of Pension Reform Completed in September 2014

The central labour market organisations, which have negotiated the content of the forthcoming pension reform, have reached an agreement on the proposal for amendments to the earnings-related pension provision.

The objective of the pension reform, which will come into force at the beginning of 2017, is to extend working life and reduce the sustainability gap of public finances. The objectives will be reached through the amendments presented below.

Retirement age raised gradually

The earliest eligibility age for old-age pension will be raised gradually as of 2017, and the new eligibility ages will apply to individuals born in 1955 or later. As of 2017, the earliest eligibility age for old-age pension will be raised by 3 months per birth-year cohort until it is 65 years. The upper age limit for old-age pension will be five years higher than the earliest eligibility age.

The eligibility age for old-age retirement will be linked to life expectancy as of 2027 so that the time spent working in relation to the time spent in retirement will remain at the 2025 level. To retain the ratio of time spent working to the time spent in retirement, the factors affecting the time spent working and the financial and social sustainability of the earnings-related scheme will be reviewed regularly. The development will be monitored through tripartite negotiations led by the Ministry of Social Affairs and Health at 5-year intervals.

New channels to retirement

A strenuous and extensive working life may offer the possibility to retire already at age 63. Alongside the disability pension there will be a years-of-service pension, which can be applied for after a working life spanning 38 years. One of the preconditions for receiving this pension is that the work is either physically or mentally wearing.

The current part-time pension will be abolished and replaced by a partial early old-age retirement. An individual can draw either 25 or 50 per cent of the accrued old-age pension already at age 61. If the old-age pension is drawn before the earliest eligibility age for old-age pension, the pension will be reduced by 0.4 per cent each month. In addition, the pension will be adjusted with the life expectancy coefficient at the time of drawing the pension. In 2025, the eligibility age for the partial early old-age pension will rise to 62 years.

The life expectancy coefficient will be retained, but it will be calculated in a more lenient manner than currently as of 2027, at which time the retirement age for all age cohorts will be 65 years. The life expectancy coefficient will also be used when calculating a target retirement age for each age cohort. The life expectancy coefficient will indicate how much additional working will be required to compensate the monthly reduction in the pension caused by the life expectancy coefficient.

Standardised pension accrual rates

The accrual rates of the earnings-related pension will change so that the annual pension accrual rate of individuals of all ages will be 1.5 per cent of the wages. Working after reaching the earliest eligibility age for old-age pension will be rewarded with a monthly increment for deferred retirement. The increment will amount to 0.4 per cent per month of the already accrued pension. A transition period for the changes in accrual rates will be regulated. During the transition period, individuals aged between 53 and 62 years will accrue a pension at a rate of 1.7 per cent per year. The transition period will span until 2025, after which the same accrual rate of 1.5 per cent will be applied to individuals of all ages. During the transition period, the employee’s contribution paid by individuals aged between 53 and 62 years will be increased by 1.5 percentage points.

Earnings-related pension contributions set

Pension will accrue from the full wage since the wage-earners’ earnings-related pension contribution will no longer be deducted from the pensionable wage. In 2016-2019, the combined earnings-related pension contribution for wage-earners and employers will be 24.4 per cent. In 2016, the contribution will be temporarily reduced, however, by 0.4 per cent. The reduction will be allocated equally between the employees and small-scale employers. At the same time, a rise in the contribution burden of large-scale employers will be prevented.

The EMU buffer can still be used to control the earnings-related pension contribution, but this will require separate decisions.

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