The cornerstone of unity

68 EMPLOYMENT PENSION SCHEME
The need for an employment pension scheme is not a Finnish invention: in all developed economies, the 
livelihood of the majority is based on paid work, and when paid work finishes due to old age or loss of working 
ability, it is replaced by an employment pension. Therefore an earnings-related pension acts as insurance 
against the termination of earnings. 
Neither are the basic solutions used in pension systems (defined benefit plans vs. defined contribution plans) 
nor the funding alternatives (pay-as-you-go or pre-funded), or even the idea that there are useful intermediate 
forms of these alternatives, Finnish inventions. 
Nor was Finland the first to come up with the intricate pattern for interaction between employment pensions 
and the labour market. Many other countries have made the same choices as Finland, starting by realising the 
usefulness of early retirement pensions in removing the elderly from the way of young people’s employment 
opportunities, and leading to recognising the complex behaviour models and attitudes that these mechanisms 
bring about. 
What can be considered a Finnish invention is the way in which the country’s many choices regarding the 
employment pension scheme have been compiled into a single well-functioning entity. Another Finnish creation is 
the decision-making process with which this entity can be adjusted to adapt to the social situation of the times, 
while maintaining the basic concept of the system and ensuring that the changes treat all groups equally. 
Earnings-related pensions are meant to replace earnings. This leads to a defined benefit system and a target 
level of approximately sixty per cent. The same cover must be available to all citizens, so the system is regulated 
by law and all-encompassing. Thanks to the pension system being set in law it has been easy to ensure that 
people can retain the pensions they have earned even when changing jobs. Thus the pension system supports 
the free movement of workers, which is one of the Four Freedoms of the European Union. 
If employment pensions are not linked to an index that is at least equivalent to consumer prices, they cannot 
fulfil their task when there is inflation. Therefore an index guarantee equivalent or superior to inflation is needed. 
Inflation is not an insurable risk, so the cost of the index link is covered jointly with a pay-as-you-go system. This 
makes it possible to guarantee. 
Partial, though significant, pre-funding helps to even out premium level differences between generations. It 
has led to funds equivalent to a large proportion of the national economy (180 billion euros, i.e. about 65% of the 
gross domestic product). Thanks to pre-funding, the premium percentage rises much more slowly than the 
pension expenditure rate. 
Administration of the pension system is shared between pension insurance companies, pension trusts and 
pension funds. Benefits are the same regardless of the pension company, so a procedure is needed by which 
unfunded benefits and the premiums collected for them are pooled between all pension institutions. The pool 
has from the start been regulated by a well-functioning clearing and cost allocation procedure. 
The decentralised organisation also allows for a certain amount of competition. In relation to statutory pensions 
regulated by law, there cannot be as much competition as in normal business; however, the decentralised 
implementation allows for more competition in terms of investment activities, service quality and efficiency than 
statutory pension systems generally allow. The decentralised system also means that this major portion of the 
national economy is not exposed to dangerously high risk. 
For the policy owner, decentralisation does not mean increased complexity: this has been ensured with the 
“last instance principle”, which means that the policy holder only needs to deal with one pension institution. 
Our employment pension scheme represents Finnish social innovation at its best: it is a balanced system 

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made up of diverse elements and developed with joint effort in order to respond to the needs of society at each 
time. 
Kari Puro 
– CEO, Ilmarinen mutual pension
insurance company 1991
–2006