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Comments on the report by Keith Ambachtsheer : “The Pension System in Finland: Institutional Structure and Governance”. Jaakko Tuomikoski 7.1.2013. General remarks. A thorough and well-informed report, by a first-rate expert, on a robust system.

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Jaakko Tuomikoski 7.1.2013

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Comments on the report by Keith Ambachtsheer: “The Pension System in Finland:Institutional Structure and Governance”

Jaakko Tuomikoski


General remarks

  • A thorough and well-informed report, by a first-rate expert, on a robust system.

  • There is no need for a complete overhaul of the system……

  • ….. which does not mean that there is no need to improve certain features!

  • My comments concentrate on private sector occupational pensions.

  • Disclaimer: maybe I am too much of an insider to avoid a certain bias.

The one and only goal

  • Fulfilling the pension promise is the one and only goal of the design and operations of the system.

  • Somebody must provide a guarantee in case of failure of a pension institution.

  • No tax money enters the system (some slight exceptions).

  • Neither is any tax money wanted, as the social partners regard occupational pensions as a part of the total remuneration of employees.

  • Hence the guarantee must be provided by other pension institutions, and finally by those who pay the premiums.

  • Thus, common rules are needed to furnish a level playing field.

  • This is not to say that the present rules are the only possible ones, or even the best ones.

The premium level as the sustainability indicator

  • The affordability of the system depends on the ability of the Finnish economy to carry the “burden” of the TyEL premium.

  • The burden relates to both the (estimated) maximum level in the future and the future path of the premium level.

  • Better investment returns lead to more moderate premium levels.

  • Risk-taking leads to higher expected returns.

  • Disappointments follow at times when actual returns do not measure up to expectations (an all too frequent experience in recent times).

  • The risk is borne by those who pay the premium.

  • Thus, their risk appetite must decide the risk level adopted.

The present solvency rules

  • Furnish the needed level playing field.

  • Safeguard the assets, as they cover liabilities instead of being just a heap of money. Insurance, not savings!

  • Can be calibrated to match the risk appetite of the social partners.

  • This has been done in 1997, 2005 and 2007.

  • Also the confidence level can be calibrated.

  • This resembles the idea in the report of not guaranteeing the whole pre-funded part of the pension.

  • True that the solvency levels corresponding to market interest rates would be lower than those reported.

  • However, the reported solvency levels are mainly used to regulate risk-taking.

  • Divergence from market-based rates is not a problem, as temporary lowering of the funding rate provides a tool at times of distress.

Partial funding

  • A strength.

  • In my mind a strength which is further enhanced by the evolutionary, not pre-determined, funding ratio. The funding ratio is a consequence, not a target.

  • This allows dynamic response to changing projections of the premium level.

  • Remember the projected premium level as the main indicator of sustainability!

  • Special case: in times of exceptional stress (i.e. 2008-) temporary reduction in funding was an efficient tool.

  • However, if such reductions become permanent, they endanger the pension promise.

The discount rate

  • Market discount rates are fine in a system that aims to be fully funded.

  • A volatile discount rate brings greater volatility to solvency levels unless matching instruments are used.

  • These are necessarily instruments with modest expected returns.

  • Wouldn’t market rates thus reduce the return-seeking possibilities?

  • The 3% (subject to infrequent ad hoc changes when absolutely necessary) rate may demand changes if low interest rates are there for decades.

  • The problem is not fatal, as in such a case the 1997 trick may be replicated.

Costs: a general comment only

  • Two cost drivers:

    1) Costs that are consequences of the overall system design.

    2) Costs that are consequences of inefficiency.

  • Also the latter exist and should be diminished.

  • When assessing the former, it is relevant to bear in mind, as the report does, that the system covers Pillars I & II and also long-term disability insurance.

  • The lack of a pension ceiling reduces also the need for Pillar III arrangements.

  • Whether this is a good thing overall depends on preferences as regards social policy. It is definitely an asset as regards administration costs.

The identity of the PIC:s

  • The main aim revisited: fulfilling the pension promise is the one and only aim of the design of the administration system.

  • Quoting the July KPA Letter: “Never underestimate the role of mission clarity in powering organizational success.”

  • Thus the most successful institutions are those that have only their mandate in mind!

  • For PIC:s, the mandate is administrating the TyEL and YEL, and nothing else.

  • They should not imagine that they have any other identity than that!

  • Competition vs collaboration: the question is extremely profound and should be revisited with the mission in mind.


  • Pay careful attention to the recommendations in the KPA report….

  • …. and doubt my comments.

  • The roadmap for achieving both representativeness and skill on the Boards is extremely important, and can be fulfilled within the present legislation.

  • It is probably not possible to achieve at the same time also the third goal, i.e. reduce the size of the Boards.

  • Strengthen the Internal Investment Oversight function and the Boards’ position in relation to senior management.

  • Revisit the question of investing domestically.

  • Appreciate intergenerational fairness and get to the sustainable premium level quickly.

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