What should you know about pensions?

Pension – even for many people in their forties, this seems like something in the distant future. But even young people who are just starting out on their working careers should spare at least a few thoughts for their future pensions, says Anna-Stina Toivonen, an expert at the Finnish Centre for Pensions.

– Finns draw a pension for an average of 23 years. That’s a long time. It’s important to realise that the money you live on for those twenty-plus years is built up throughout your working career. All the decisions you make between the ages of 17 and 70 affect the size of your pension. Do you take years out from work or studies? Do you work part-time or full-time? Toivonen explains.

Sometimes retirement comes along sooner than you thought. Retirement can be brought forward by illness or accident. The amount you earn even in a short career and the pension you accumulate affect the size of a disability or sickness pension.

1. What sorts of pensions are there?

Earnings-related pensions paid to those in paid employment are the main pensions for PAM members. Since 2017, earnings-related pensions are accrued from all paid employment from the age of 17 to 70. Currently every euro earned under the age of 53 gives you 1.5 cents of pension. However, the age limits that existed before 2017 will still affect many people's pension, as the occupational pension laws do not change retroactively.

If your earnings-related pension is small, under 1,400 euros a month, earnings are supplemented by the national pension paid by the state.

The average pension that Finns get nowadays is around 1,800 euros a month.

National and earnings-related pensions are divided up further into old-age, disability and survivor’s pensions. You get an old-age pension if your working career was long enough and you retire. Disability pensions are intended for those who retire before the official retirement age due to illness or injury, for example. Survivor’s pensions are for surviving spouses, under certain conditions, and children under the age of 20 who have lost their parents.

The conditions for survivor’s pensions are complex. You can take the Finnish Centre for Pensions’ test to see if you are entitled to one

The size of a survivor’s pension is determined by the income and accrued pension of the deceased spouse or parent.

There are separate systems similar to earnings-related pensions for the self-employed, farmers and grant recipients: self-employed persons’ and farmers’ pensions. The same person can get a pension from more than one system, or even all three.

2. Who pays my pension?

Pension contributions total 25.85 per cent of wages. The majority of this is paid by your employer. Employees pay pension contributions of 7.15-8.65 per cent of their wages. Contributions vary depending on your age. For those aged under 53 the contribution is 7.15 per cent.

Employees do not need to worry about paying pension contributions because employers deduct the amount from wages automatically. Pension contributions are itemised on your payslip.

Self-employed persons take care of their pension contributions themselves.

National pensions are paid by the state.

3. Who decides how high pension contributions are?

The employees’ and employers’ labour market confederations – SAK, STTK, Akava and EK – jointly agree the level of pension contributions and how they are divided up between employers and employees.

– The idea is that those who pay also decide, PAM’s research director Antti Veirto points out.

Before 1993 employers paid all pension contributions. With the recession of the 1990s the confederations agreed to transfer part of the contributions to employees. With the competitiveness pact of 2016 the employee share was increased further.

4. What happens to the pension contributions deducted from my pay?

Employers pay contributions to the pension insurance companies that manage pension money. The majority of the contributions go to funding the pensions of current pensioners.

– Our pension system is based on a generational contract. Today’s workers pay the pensions of today’s pensioners and when the time comes the workers of the future will pay our pensions, Toivonen explains.

The employment pension system was created at the end of the 1950s. In the early years, no reserves had been built up to fund those entering retirement at the time.

A small proportion of the contributions are put in a fund for the future. Pension insurers invest the money in property and shares, among other things. There are strict regulations around how pension funds are invested. Very risky investments are not allowed.

5. Why have pension contributions been increased? 

The labour market confederations have jointly agreed to an increase in pension contributions.

These increases were intended to secure the sustainability of the pension system. So that pensions can continue to be paid out in future.

For some time now, the cohorts being born have been smaller than previous cohorts. This means that the number of people funding pensions is going down all the time. This is one reason why pension contributions and the retirement age have been increased.

In the recession of the 1990s and the competitiveness pact of 2016, contributions were transferred from employers to employees. This was designed to make Finnish businesses more competitive.

6. What else do you get pension from apart from working?

There are also some unpaid periods that accumulate pension, Toivonen says. For example, studying can accumulate pension. A basic vocational qualification gives you around 35 euros more pension a month, a university of applied sciences degree around 47 euros and a master’s degree 59 euros.

Family leave also accumulates pension. For example, the level of earnings-related maternity allowance is also reflected in the amount of your future old-age pension. Earnings-related unemployment allowance also accumulates pension. In order to get earnings-related unemployment allowance you have to be a member of an unemployment fund. These are run by trade unions and some private operators.

Your pension pot is also increased by any earnings-related rehabilitation periods or sickness allowance.

Basic unemployment allowance does not accumulate pension.

7. When can you retire on an old-age pension? 

The minimum retirement age is going up slightly all the time since people’s life expectancy is also increasing. Young people will probably be retired for longer than older generations.

The current estimate is that for those born in 2002 the minimum retirement age will be 68 years and 7 months. Those born in 2002 will be able to take a partial pension at around the age of 65 years and 7 months.

The minimum retirement age for those 30 years older, born in 1972, is 65 years and 11 months. They can take a partial old-age pension at the age of 62 years and 11 months.

A partial old-age pension means you are paid 25 or 50 per cent of the pension you have built up. This permanently decreases your future full old-age pension, however.

If you are partially retired, you can either work or leave working life entirely.

8. What is the pensioner’s index?

Pensions are tied to an index. This means that as wages and living costs go up, pensions also go up. This preserves the purchasing power of pensions.

Current pensioners’ pensions are tied to the earnings-related pension’s index, also called the pensioner’s index. The change in price levels weighs 80 per cent in the index and wage levels 20 per cent.

The pension credits of those in work accrue in line with the wage coefficient. In this index, wages weigh 80 per cent and prices 20 per cent.

In times of high inflation, i.e. rising prices, the pensioner’s index increases pensions more than the wage coefficient does.

The change in the age structure of the Finnish population

9. Will there be enough money in future for the pensions of people now in their twenties? 

Both Toivonen from the Finnish Centre for Pensions and PAM’s Veirto are confident about the future of the pension system. Both of them affirm that those now in their twenties will get decent pensions when the time comes.

– We regularly run calculations and consider various scenarios of economic and demographic trends. The pension system is adjusted and corrected based on these calculations. For example, the retirement age has been increased, Toivonen says.

10. How much pension do I stand to get?

The amount of your pension is affected by how much your wages are, the number of years you have been working and any breaks in your working career. Working part-time rather than full-time reduces your earnings and thereby also your future pension.

You can use the Finnish Centre for Pensions calculator to estimate how much pension you will get:

You can check how much pension you have accrued so far in your pension record.

Toivonen recommends checking your pension record carefully. Does it include all the paid employment you have had?

– Nowadays omissions in pension records are rare. Typically, a household has acted an employer and has omitted to meet its obligations. It’s advisable to notify any omissions straight away to your pension provider, because it’s difficult to correct mistakes decades from now. The insurance company will take of this, you don’t need to contact the employer yourself, Toivonen advises.