Country report Finland

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1 Country report Finland EFBWW - EARLY RETIREMENT IN THE CONSTRUCTION INDUSTRY 1. Demographic development in the construction industry In Finland live 5.35 million people including about 6% Swedes, so that the second national language is Swedish. The employment rate is about 69%. In the Finnish construction industry about 140,000 workers (100,000 blue-collar workers) are employed in 30,000 companies. In the recent years these figures has remained very stable. Since 2004 the development of the construction industry is characterized by steady growth of between 3% and 6% after the start of the new century stagnation was evident. The age distribution in construction is emphasized into age groups The structure is disadvantageous. The retirement of big age cohorts (born in ) is a current process and a great challenge for the society and all branches. In Europe, Finland is the first country to face steep ageing due to these cohorts. The after-war baby boom was stronger than elsewhere! People also live longer, thanks to the welfare state! This means a competition of skilled workers between different branches. However: In the beginning of this decade, before the financial crisis, construction has managed quite well. It has been able to offer steady jobs for new generations. That is why the share of younger wage-earners has increased and vocational training has been successful in quantity. On the other hand the import of posted workers is also a growing business with its problems. Age distribution of construction workers 2009 % Age construction industry In comparison to industry the lower figures in age groups in construction are due to gigantic unemployment caused by the depression in the first half on 1990 s. Vocational schools had big problems in getting pupils, especially in construction.

2 2. Description of the pension landscape 1. Pillar There are two statutory pension schemes: a) National pension scheme guarantees a minimum pension paid only if earnings-related pension is very small administered by the Social Insurance Institution (Kansaneläkelaitos Kela) under the auspices of Parliament tax- financed. b) Employment based earnings- related pension scheme Earnings-related pension insurance is a central part of the Finnish social security system. Employment in Finland is covered by a statutory and compulsory earnings-related pension scheme. Earnings- related pension scheme is partly funded. Pre-funded scheme covers a quarter of pension outlays. The pre-funding is collective. The rest is financed by employers and employees contributions. The average contribution rate in 2010 is 22%. The amount on pension funds was 125 Mrd euros. This sum could cover pensions of 6-7 years. 10 % of the money that circulates in the national economy, is pension fund money. 2. and. 3. Pillars Because of the dominance of the existing compulsory scheme, second and third pillar are not well developed. On the other hand the demand on supplementary pension coverage is expected to grow. The reason for this is the policy to control the growth of pension expenditure, which leads to lower level of occupational pensions. Voluntary occupational schemes and private pension savings are not significant in volume. In Finland the third pillar is more popular than the second. It is possible to take a private pension insurance, that more or less (mostly less) completes the statutory pension. Over 0.5 million citizens have these private arrangements that are organized by insurance companies. Recently these schemes have lost a great part of their popularity, because their taxation has been tightened and there are more profitable investment tools for individuals. Pension funds and foundations play a minor role in the Finnish pension market. So, voluntary occupational pension schemes in Finland are less common than in other European countries. They cover about 15% of the workforce, mainly executives. Voluntary plans often simply involve paying additional contributions into the compulsory system. There are three funding methods for voluntary pension plans, which can also be used to finance benefits under the earnings-related pension system. These are: Pension funds Pension foundations Insured schemes

3 3. Retirement scheme in general In Finland, almost all gainful employment is covered by pension provision. Self-employed persons, farmers, seamen and public-sector employees have their own pension acts. The acts offer pension provision which more or less corresponds to that of the Employees Pensions Act (TyEL). The extensions introduced from the beginning of 2005 as regards the taking into account of unpaid periods improve pension provision especially for women. 4. Retirement age, life expectancy and pension expenditures The retirement age in Finland is flexible. Previously, people were allowed to retire at the age of 65. As of 2005 the choice is left to the individual to retire in an age bracket between 63 and 68. Strong financial incentives to retire later were implemented. Early retirement is possible as of the age of 62 linked to reductions of the pension income accounting for 0.6% per month. The main objective of the pension reform was to postpone the average effective retirement age. From 2010 new mechanism is being implemented that takes into account changes in life expectancy. The life expectancy coefficient will have influence on the pension amount according to developments in life expectancy to keep the increase in pension expenditures under control by reducing benefits as people live longer. 5. The accrual of earnings- related pensions The earnings-related pension accrual rate depends on the age of the employee. It increases with increasing age. Earnings-related pensions already start accruing at the age of 18. The accrual rates are: 18 52: 1.5% per year 53 62: 1.9% per year 63 68: 4.5% per year working during retirement: 1,5 % per year. The pension is calculated as a percentage of annual earnings. So, wages and salaries need to be adjusted to the actual wage and price level at the time of the pension calculation. For this purpose a wage coefficient applies to earlier wages and salaries. The coefficient is calculated on the annual changes in the wage and price level with a weighting of 80% of wage development and 20% adjustment to movements in prices. By contrast, the earning-related pension already in the payout phase is adjusted annually according to the wage and price level in a reverted ratio. The weighting is as follows: 20% of wage level and 80% changes in prices.

4 6. Advantages for people prolonging their professional career A pension accrues from all earnings. In Finland there is no ceiling (upper limit) in pensions. In 2005 the ratio was raised to 4.5% for 63 years old and older. It is a strong incentive for working longer and is therefore increasing pension benefits remarkably. The earnings-related pension acts make it possible to work part-time and receive a part-time pension instead of the reduction in income. Pension also accrues from work after retirement. It will be paid to pensioner from the age of Contributions to the pension system For the first pillar the average contribution rate in 2010 is 22%. The rate is unequally split between the employer and the employee. Employees aged between 18 and 52 pay 4.5% and those aged 53+ pay 5.7%. The employer bears the remaining lion s share. The precise contribution rate for the employer depends on its size; the basis is the total wage bill. The employer takes out pension insurance for the employees with the pension company of its choice. 8. Disability If you become ill and cannot continue working even by means of rehabilitation or assistance, you may be entitled to a disability pension. It is possible to retire on an old-age pension between the ages of 63 and 68. If the person becomes incapable of work after turning 63 years, he or she is granted an old-age pension instead of a disability pension. The age limit for the disability pension is 18 years. The applicant is required to have been in employment. 9. Security for the aging unemployed people Those, who were born in 1950 or later and become unemployed, will get unemployment security till they get to age of 65. They may receive unemployment allowance (about 60 % of the wage for average construction worker) for additional days if they have turned 59 before the end of the 500 unemployment allowance days. During the additional days it is possible to apply for old-age pension to be paid already at the age of 62, with no reduction being made to the accrued pension. The lower age limit entitling to additional days will rise to 60 years starting 1 January 2011, and the new age limit applies to employees born in 1955 and later. Self employed people are not entitled to additional days.

5 10. Industrial relations in pension policies Employer-specific pension provision or pension provision based on labour market agreements as well as pension provision based on personal insurance policies are not very common in Finland compared to many other European countries. The reason for this is, among other things, that the statutory earnings-related pension scheme has no upper limit in euros. However, the role of social partners in pension system is crucial because of their position in the administration in the pension system and the tripartite preparation of legislation. The administration of the earnings-related pension scheme is decentralized. In the private sector earnings-related pension provision is handled by pension insurance companies, company pension funds and industry-wide pension funds. Construction workers pensions are taken care of at pension insurance companies. Specialized pension providers and their activities are coordinated by the Finnish Centre for Pensions and supervised by the Ministry of Social Affairs and Health and by the Insurance Supervisory Authority. The public sector has its own authorized pension providers. The earnings-related pensions are financed jointly by the employers and the employees. The private-sector earnings-related pension scheme has already from its beginning in the 1960s used partial funding. The State, the employees and the employers as well as the entrepreneurs all influence the development of the legislation on the earnings-related pensions. Earnings-related pension provision is based on law, but the principles are mainly agreed on in negotiations between the labour market organizations. In the beginning the establishment of the earnings-related pension scheme was carried out with the participation of the labour market organizations, and earnings-related pension provision is still a special focus of interest for the labour market organizations. 11. A typical case In the year % of age group took part in working life, in age group the figure is 6 %. It is clear that only some individuals of construction workers last at work till 65 years. The average retirement age among private sector workers is 59, 7 years (2009). For building workers it is a bit lower. People leave for old-age pension at the age of 63, but a great amount on disability pensions makes the average figure low. The average gross pension (2010) is 1,344 euros per month. Construction workers get more. The average gross pension is about 1,700 euros per month. There still are in-betweens in the pension system. Amount of small- income pensioners is not decreasing. Today a typical national-pensionist is an elderly woman. In near future this role is given to disregarded men. A small improvement will be the pension guarantee in 2011: 688 euros/month. 16 % of pensioner households are low-income households (year 2008).

6 12. Current political trends and trade union observations Population ageing challenges the Finnish pension system. The large age groups of post-war babyboomers are at retirement age and age groups entering the labour market are smaller than the age groups that exit. The share of total pension expenditure in GDP will increase from approximately 11 per cent in 2005 to a good 14 per cent in the 2030s. The main subject in recent years discussion has been lengthening working careers. One should start working earlier and get to pension later. Employers` central organization (EK) demands, that Finland should bring the legal minimum retirement age to 65 years. It also states, that the security for ageing unemployed workers must be executed. After EK the modern system tempts companies to fire ageing workers. Trade union point is that the best way to lengthen work careers is to create more jobs, because there are many unemployment periods inside workers careers. Another big issue is the growing amount on disabled workers. There are (out of 2.2 million workers) individuals at disability pension. We must be able to slow down the speed of working life to prevent these figures to get even worse. However, there is a mutual understanding that several kinds of efforts are to be done to make it more and more possible for workers to remain at work. So, a wide range of projects are running. In construction the labour market organizations have started their own preparations according to the collective bargaining solution Heavy work leads to early retirement. Thus 44 % out of disabled suffer of depression. The amount of depressed is increasing also at construction, especially among younger generations. If a 25 year old person must leave the working life because of disability, there must be 37 workers working till age of 63 to compensate the loss. In this speed people are mentally and physically finished at the age of about 60. It is simply impossible to raise the legal retirement age. There should rather be more flexible possibilities, like parttime pension, to achieve at least the modern retirement age. Flexibility has caused results: Nowadays 41 % out of year old people are still working. It is 50 % more than ten years ago. Pension project "Analysis and comparison of early retirement and pension provisions in the European construction sector" - EFBWW

7 Finland - facts at a glance Construction sector: - Number-Workers: 140,000 (of which blue-collar workers 100,000) -Number-Firms: 30,000 - Workers aged over 60: 7% - Pensioners: 95,000 (estimated: including employee pension + disability pensioners) How is the general pension system organised? 1st Pillar: National pension scheme minimum pension, tax-financed Statutory and compulsory employment-based earnings-related pension scheme, Contributions: Employer: 17.5% or 16.3% Workers: years 4.5% The rate depends on the size of the company % 2nd Pillar: unimportant 3rd Pillar: Voluntary occupational schemes are not significant in volume Other pensions: Own individual insurance pension schemes, not significant in construction Statutory retirement age: Number of years' contributions required: not necessary Deductions, the earlier the retirement Actual general retirement age: 59.7 years (private sector), construction workers a bit lower Planned / future statutory retirement age: Minimum pension in : 688 (tax-financed) Pension as % of final earnings: aim: 60 % Average gross/net wage construction workers: 2,700 /2,150 per month Average gross/net pension in : 1,344 per month Average gross/net pension construction workers: 1,700/1,350 per month) as 60 % Early retirement possible: yes, years Reduction in pension: 0.6% per month Part time pension From age: 60 Sickness: Disability pension Arduous work: none in private sector Unemployment: unemployment security till 65 (for those born in 1950 and later) unemployment allowance (about 60% of the wage) for additional days for those, who have turned 60 before the end of the 500 unemployment allowance days

8 References Country profile Finland. Pension system. ( Finland. Compiled by Alilanz Global Investors. Pension System Design. Pensions funds online. ( The Finnish Pension Scheme in Brief. Eläketurvakeskus (Center of Pension Security) ( Lassila Jukka: Pension Power in Finland. Finnish Academy. Presentation of project in internet. ( Liikanen Erkki. Governor, Bank of Finland. Population ageing in Finland: Consequences and policy actions. Bank of Greece Presentation (available in internet) New pathways for Finnish pensions: an international and comparative view. Prof Yves Stevens. (presentation in internet) Rakennusalan koulutus- ja osaamisbarometri The education and craftsmanship at the construction branch in Finland barometer. RIA Finland Tilastokeskus. Työvoimatutkimus. Statistics Finland. Work force survey. (

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