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

Jaakko Tuomikoski


General remarks
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
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 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
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
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
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
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 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.