1. The Pension System in Finland Designed for Finnish society Based 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. 7.1.20132

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’s role in the system? How should the overall efficiency of the pension system be enhanced? Why and how should the current 75-25 ratio between the pay-go and pre- funded contributions change over time? Investing inside vs. outside Finland: should the ”home-bias” be restricted or enhanced? 7.1.20133

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 (= everyone contributes 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) 7.1.20134

5. Part of the cost difference per insured or retired member stems from this value-based design Our obligatory pension scheme combines comprehensive social security with comprehensive occupational pensions. In many other countries these two are run separately. All work and even some unpaid periods are covered. The number of employers served is therefore huge. The number of small employers (and small insurance policies) is considerable too. This is not typical for the international peers. All services are designed to be easy and safe for employers and employees. Many benefit administration services are ”insourced” to PICs (instead of outsourcing them to employers and/or insured members). 7.1.20135

6. Effectiveness is a key factor in any sector today. It needs to be constantly evaluated and developed also in pension institutions. PICs are already co-operating closely in certain fields (especially IT) Furthermore, fusions have occured, aiming to reinforce economical and operational effectiveness. 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.  There seems to be a relevant function and demand for various types and sizes of PICs in the future too (refl. the multiplicity of the employees and branches covered)  It’s good to assess thoroughly where to seek more co-operation and where could be room for more competition 7.1.20136

7. Why and how should the 75-25 ratio chance over time? Background: Larger funds create more returns. the higher the funding rate, the lower the future contribution rate the funding rate depends on i) the level of contributions directed to the funds and ii) the returns earned on the funded assets The expected rate of return depends on the risk level of the portfolio. The level and time-path of the contribution rate and the risk level attached to it are among the most important issues in the agreements between social partners (labor market organisations). 7.1.20137

8. Should the ratio chances be decided consensually or should they be back- stopped by automatic decision making rules? The Finnish social partners have been able to make consensual decisions. They have also been able to agree on major reforms (especially the 2005 reform). There is no quarantee that government decisions would be wiser, neither that the eventual pre-determined rules would be followed (comp. to the situation in Sweden).  When decisions are made, the existing facts have to be born in mind: there are only three changeable elements in financing the system Level and time path of future contributions Future pension benefits Expected investment returns (the risk level att. to future contributions) 7.1.20138

9. Investing inside vs. outside Finland? About 1/3 of the pension assets are now invested in Finland This share has been diminshing during the last 10 years. Some PICs invest less in Finland than others. It has become more demanding to get good premiums from Finnish assets. Finland is definitely a too small a market for the whole amount of assets. Should the assets be fully invested outside Finland as a diversification strategy? (75 % ”pay-go” part already heavily dependent on the health of Finnish economy) This diversification strategy would also move the pension assets further away from the reaches of Finnish government and corporate sector. Could that be an advantage too? 7.1.20139

10. The ”home-bias” is not as risky as it seems at the first sight because many Finnish stock-exchanged companies are global actors. Their business-risks lay therefore mainly outside Finland. Information advantage on home market is always considerable. An eventual investment-related ”good circle” can be attained. It can deminish risks in the ”pay-go” part of the pension system to a certain extent. Investing inside Finland stabilizes Finnish financial markets and makes them more stable for foreign investors aswell. This strenghtens the overall competitiveness of Finnish economy. But it would probably not be wise to increase the home-bias from present levels either. 7.1.201310

11. Concluding remarks  The sole aim of the PIC’s investment activity is fullfilling the pension promise.  Investment decisions are made by the PICs themselves. That should be the case in the future too. No binding rules on the extent of investing inside vs. outside Finland should be set.  The pension system is part of Finnish national social security. Decisions on its future reforms should therefore be made in Finland.  The system should be designed for Finland and based on Finnish values in the future too.  Decision-makers’ preferences should reflect system’s long-run financial sustainability and intergenerational fairness.  Thorough assessment on the respective roles of competition and co-operation is welcome and it should be made in this same context. 7.1.201311