Earnings-related pension

A new provision would be added to the Self-Employed Persons Pensions Act (YEL) concerning the regular monitoring of earnings confirmed under the Act and a review procedure included in the monitoring. The Act would also specify the information which the pension insurance institution should take into account to confirm earnings under the Act when a self-employed person applies for an insurance or when the level of confirmed income is reviewed. These clarifications would improve consistency when the level of earnings is confirmed in individual cases and by different pension institutions.

Laying down provisions on the information to be taken into account would help not only pension institutions but also the self-employed persons to assess the level of confirmed income more accurately than at present.

At present, a self-employed person can apply for an adjustment of their confirmed income only when they can show that the circumstances affecting their confirmed income have materially changed. For this reason, the self-employed person alone is responsible for ensuring that their confirmed income is set at the correct level. The only adjustment that takes place regularly is the annual index adjustment. According to the proposed amendment, pension providers would review the level of confirmed income on a regular basis every three years.

At the entry into force of the new provisions, pension providers would initially review their existing insurance portfolios in 2023–2025 according to the following principles: In 2023, pension providers would review confirmed incomes of no more than EUR 15,000 that have not been adjusted during the previous three years. Confirmed incomes of EUR 15,000–25,000 would be reviewed by the end of 2024, unless they have been adjusted during the previous three years. Finally, confirmed incomes of more than EUR 25,000 would be reviewed in 2025, unless they have been adjusted during the previous three years.

A revision on a fast schedule is necessary in order to ensure fair competition between self-employed persons. From 2026, the review would be carried out on a rolling basis if confirmed income has not been adjusted in the previous three years.

The bill also includes a proposal for a maximum increase in confirmed income when the review is carried out for the first time after the entry into force of the Act. Confirmed income could be increased by no more than EUR 8,000 or 20 per cent, depending on which would mean a greater change in confirmed income. In this case, earnings confirmed at the lower limit (EUR 8,262 at the 2022 level) could increase to a maximum confirmed income of EUR 16,262, in which case the self-employed person’s insurance contribution would rise by about EUR 170 per month.

The pension provider would submit to the self-employed person a written proposal for the adjusted confirmed income. The self-employed person could then provide supplementary information on the level of their earnings. Alternatively, the pension provider could issue a conditional decision that would enter into force unless the self-employed person responds to the conditional decision within two weeks of receiving the decision.

The self-employed person's annual confirmed income under the Self-employed Persons Pensions Act will continue to be calculated in such a way that it corresponds to the person’s work input. According to the current Act, “confirmed income corresponds to a wage that would reasonably have to be paid, if the self-employed work referred to in this Act was carried out by another, equally competent person in place of the self-employed, or otherwise corresponds to such compensation that, on average, equals the work.” (section 112 of the Self-Employed Persons Pensions Act, 1272/2006) The legislative proposal does not include any changes to these grounds.

The proposal would not change the accrual principles of pension provision. Self-employed persons receive an earnings-related pension from the self-employed person’s pension insurance on the same grounds as employees.

The purpose of the legislative proposal is to ensure that the self-employed person’s confirmed income would be at the correct and sufficient level throughout the person’s career, improving the level of their pension and social security.

In recent years, it has been observed that the level of confirmed income does not necessarily correspond to what is required by the current Act. According to studies by the Finnish Centre for Pensions, the average confirmed income under the Self-Employed Persons Pensions Act has fallen significantly since 2014 in relation to the overall development of earnings levels. In practice, the level of insurance cover for self-employed workers is increasingly lower than that provided in the Act, according to which the level should correspond to the salary of an equally competent employee. This is called underinsurance.

In addition, in spring 2021, the Financial Supervisory Authority reported on the practices of pension institutions in determining confirmed income under the Self-Employed Persons Pensions Act. It turned out that according to some practices which pension institutions had adopted to calculate the self-employed person’s confirmed income the work input and the confirmed income did not match. Pension institutions had confirmed self-employed earnings simply based on the self-employed person’s own notification,  and consequently some self-employed persons had been given a wrong idea of how their earnings should be confirmed.

Underinsurance leads to a wide range of problems, the most serious of which is the self-employed person’s insufficient pension provision. For this reason, many self-employed are at risk of relying solely on national pension and guarantee pension at the end of their careers.  In addition, the public debate has ignored the fact that confirmed income under the Self-Employed Persons Pensions Act also forms the basis of statutory social security during the self-employed person's working life, and it is not only a question of pension benefits. For example, daily allowances during parental or sickness leave are determined on the basis of confirmed income. The amount of confirmed income is also decisive for whether the self-employed person can insure themselves against unemployment.

Underinsurance is also a problem from the perspective of general government finances. Central government transfers to the system maintained under the Self-Employed Persons Pensions Act have increased significantly over the past decade. In 2010, central government transfers amounted to EUR 96.6 million. By 2020, they had increased to EUR 349 million a year.

Another problem that has been noted is that the Self-Employed Persons Pensions Act does not include sufficient provisions on reviewing and adjusting confirmed income. Therefore, even when a business has become established, nobody has checked whether the confirmed income under the Act is at the level it should be. For this reason, a procedure is proposed for regular monitoring and review of confirmed income under the Act.

Under the Self-Employed Persons Pensions Act, confirmed income must correspond to the financial value of the self-employed person's work input. The value of work input does not equal the company’s business income or any personal wages which the self-employed person may draw from the business. Instead, work input corresponds to the financial value which the work would have if it was performed by an employee.

The proposal presents the median pay of employees in the sector, based on statistical data, as the baseline data for pay or compensation. In addition to the median pay information, the calculation would take into account information on the seasonal or year-round nature of the self-employed work, full or part-time nature of the activity, the number of employees, the turnover, and other factors that may be relevant to the determination of the financial value of the work input. These factors would include the number of weekly working hours, engagement in part-time self-employment alongside full-time paid employment, annual pay received or estimated, and payments invoiced through an invoicing service provider. Based on the company’s invoicing data, the value of work input could be lower than median pay.

Self-employed persons may provide the information and reports described above regarding their self-employment. When confirming the earnings, the pension institution must exercise overall consideration and take into account in a balanced manner all the information it has obtained.

The insurance obligation of the earnings-related pension scheme ensures that everyone is prepared for the risks of incapacity for work, old age and the death of a family provider. Both employees and self-employed persons, regardless of their individual needs and circumstances, take part in shouldering these social risks as provided by law.

The self-employed person’s risk entails that, regardless of their current financial situation, they must pay the statutory social security contributions. Similarly, employees cannot change the percentage of their pay for which the earnings-related pension is accrued or their earnings-related pension contributions. The low level of self-employed person's confirmed income may also have an impact on the structure of the labour market through labour pricing. Underinsurance may determine whether an organisation hires an employee or outsources the work to a self-employed person. Competition between self-employed persons may also be distorted if some of them assure themselves at a lower level than that provided by law.

The Self-Employed Persons Pensions Act does not contain special provisions on part-time self-employment.

Secondary employment affects the amount of the self-employed person's work input, and since confirmed income is based on the work input, secondary employment is taken into account when confirming the earnings under the Act.

The bill states that information on the self-employed person’s competence and experience are taken into account when confirming their earnings. It is understandable that a self-employed person who has recently graduated will not have the same competence and experience as somebody who has been working in the profession for a long time. This is an example of a situation where a self-employed person's earnings can be confirmed at a level lower than median pay.

In addition, under the Self-Employed Persons Pensions Act, a newly self-employed person is granted a reduction in their pension insurance contributions for up to four years. The reduction is 22 per cent. Given the fact that, according to the Finnish Centre for Pension’s data, three quarters of all self-employed are engaged in their self-employment for at least five years, a reduction in their contributions over four years is sufficient in most cases to establish their business.

All self-employed are also entitled to flexible insurance contributions under the Self-Employed Persons Pensions Act. A self-employed person may take out pension cover based on earnings that are higher or lower than their confirmed income, without having to change the amount of confirmed income. The adjusted contribution can be 10–20 per cent lower (or 10–100 per cent higher) than the monthly contribution based on confirmed income. If the self-employed person makes use of this flexibility, their pension accrual is based on insurance contributions that are higher or lower than those based on their confirmed income. However, pension contributions have limited flexibility.

The legislative proposal does not affect this opportunity to lower the insurance contribution.

The drafting was carried out as part of official duties at the Ministry of Social Affairs and Health, supported by a working group which was set up in autumn 2020 and had representatives from central labour market organisations, the organisation for Finnish SMEs Suomen Yrittäjät, the Finnish Centre for Pensions, the Finnish Pension Alliance TELA and the Ministry of Finance.

The drafting completed at this point is based on a working group appointed for 2017–2019 to examine alternative solutions for underinsurance and ways to increase the flexibility of insurance under the Self-Employed Persons Pensions Act. The working group published its report in March 2019 (Development of earnings-related pension provision for self-employed persons, Working Group’s Report, Reports and memorandums of the Ministry of Social Affairs and Health 2019:23).

The shortcomings brought up by the Financial Supervisory Authority in spring 2021 in the pension institutions’ practices for determining confirmed income under the Act have also been taken into account in the legislative drafting.

The earnings-related pension scheme is based on tripartite preparation in which the central government, employees, employers and self-employed persons all contribute to the development of pension legislation.