The Pension System in Finland Designed for Finnish society Based on Finnish values

1. The Pension System in FinlandDesigned for Finnish societyBased on Finnish values Comments on the report of Keith Ambachtsheer Suvi-Anne Siimes, Finnish Pension Alliance TELA

2. General remarks Report is well written and worth reading! Its suggestions deserve to be discussed and assessed openly! Notice: • Many of the themes (solvency, governance, competition) are under scrutiny at the moment in Finland! • Report’s findings and recommendations can be taken into account in the forthcoming reforms.

3. Closer comments on the following key findings and suggestions of the Report: • Benefit administration costs per insured or retired member: the report states that these costs are relatively high. How concerned should we be about that finding? • Value of PIC competition is stated to be questionable.What is competition’srole in the system? Howshould the overallefficiency of the pensionsystembeenhanced? • Why and howshould the current 75-25 ratiobetween the pay-go and pre-fundedcontributionschangeovertime? • Investing inside vs. outside Finland: should the ”home-bias” berestrictedorenhanced?

4. Overall system design reflects deliberate value-choices- the system is designed for Finnish society and based on Finnish values Comprehensive obligatory pension scheme (instead of better Pillar II benefits for occupationally stronger groups only): • all work (also low-income, part-time and short-time), and even times of unpaid periods such as studying and parental leaves, contribute to one’s future pension (= everyonecontributes to and benefits from the system) • our system is compatible with labor mobility (= efficient use of human resources in a small open economy) • as comprehensive risk-sharing as possible (instead of more risk borne by individuals)

5. Part of the cost difference per insured or retired member stems from this value-based design Our obligatory pension schemecombines comprehensive social security with comprehensive occupational pensions. In many other countries these two are run separately. Allwork and evensomeunpaidperiodsarecovered. The number of employersserved is thereforehuge. The number of smallemployers(and smallinsurancepolicies) is considerabletoo. This is nottypical for the international peers. Allservicesaredesigned to beeasy and safe for employers and employees. Manybenefitadministrationservicesare ”insourced” to PICs (instead of outsourcingthem to employersand/orinsuredmembers).

6. Effectiveness is a keyfactor in anysectortoday. Itneeds to beconstantlyevaluated and developedalso in pensioninstitutions. • PICs are already co-operating closely in certain fields (especially IT) • Furthermore, fusionshaveoccured, aiming to reinforceeconomical and operationaleffectiveness. Competition is only a means, not an end in itself. It should always support the overall mission and value-choices of the pension system and its design. • Thereseems to be a relevantfunction and demand for varioustypes and sizes of PICs in the futuretoo (refl. the multiplicity of the employees and branchescovered) • It’sgood to assessthoroughlywhere to seekmoreco-operationand wherecouldberoom for morecompetition

7. Why and how should the 75-25 ratio chance over time? Background: Largerfundscreatemorereturns. • the higher the fundingrate, the lower the futurecontributionrate • the fundingratedepends on i) the level of contributionsdirected to the funds and ii) the returnsearned on the fundedassets The expectedrate of returndepends on the risklevel of the portfolio. • The level and time-path of the contributionrateand the risklevelattached to itareamong the mostimportantissues in the agreementsbetween social partners (labormarketorganisations).

8. Should the ratio chances be decided consensually or should they be back-stopped by automatic decision making rules? • The Finnish social partnershavebeenable to makeconsensualdecisions. Theyhavealsobeenable to agree on majorreforms (especially the 2005 reform). • There is no quaranteethatgovernmentdecisionswouldbewiser, neitherthat the eventualpre-determinedruleswouldbefollowed (comp. to the situation in Sweden). • Whendecisionsare made, the existingfactshave to beborn in mind: thereareonlythreechangeableelements in financing the system • Level and timepath of futurecontributions • Futurepensionbenefits • Expectedinvestmentreturns (the risklevel att. to futurecontributions)

9. Investing inside vs. outside Finland? About 1/3 of the pensionassetsarenowinvested in Finland • Thissharehasbeendiminshingduring the last 10 years. • SomePICsinvestless in Finland thanothers. • Ithasbecomemoredemanding to getgoodpremiumsfromFinnishassets. • Finland is definitely a toosmall a market for the wholeamount of assets. Should the assetsbefullyinvested outside Finland as a diversificationstrategy? (75 % ”pay-go” partalreadyheavilydependent on the health of Finnisheconomy) • Thisdiversificationstrategywouldalsomove the pensionassetsfurtherawayfrom the reaches of Finnishgovernment and corporatesector. Couldthatbe an advantagetoo?

10. The ”home-bias” is not as risky as itseems at the firstsightbecause • manyFinnishstock-exchangedcompaniesareglobalactors. Theirbusiness-riskslaythereforemainly outside Finland. • Informationadvantageon home market is alwaysconsiderable. • An eventualinvestment-related”goodcircle”canbeattained. Itcandeminishrisks in the ”pay-go” part of the pensionsystemto a certainextent. • Investing inside Finland stabilizesFinnishfinancialmarkets and makesthemmorestable for foreigninvestorsaswell. Thisstrenghtens the overallcompetitiveness of Finnisheconomy. Butitwouldprobablynotbewiseto increase the home-biasfrompresent levelseither.

11. Concluding remarks • The soleaim of the PIC’sinvestmentactivity is fullfilling the pensionpromise. • Investmentdecisionsare made by the PICsthemselves. Thatshouldbe the case in the futuretoo. No bindingrules on the extent of investing inside vs. outside Finland shouldbe set. • The pensionsystem is part of Finnish national social security. Decisions on itsfuturereformsshouldthereforebe made in Finland. • The systemshouldbedesigned for Finland and based on Finnishvalues in the futuretoo. • Decision-makers’ preferencesshouldreflectsystem’slong-runfinancialsustainability and intergenerationalfairness. • Thoroughassessment on the respectiveroles of competition and co-operation is welcome and itshouldbe made in thissamecontext.