Status of Finland’s earnings-related pension system in EU law

The Finnish earnings-related pension system has an established and recognized status within EU law. Our earnings-related pension system is outside the scope of cross-border competition in the EU insurance sector and outside the life insurance legislation that governs it. The legal status of our earnings-related pension system is based on the social security character of our legal status in the EU. Agreement on the legal status was reached in 1995, when Finland joined the EU.

Legal status as a component of Finland’s Treaty of Accession to the EU

Seen from the perspective of EU law, the Finnish earnings-related pension system is outside the scope of cross-border competition in the EU insurance sector and outside the life insurance legislation that governs it. Thus, the life insurance legislation that enables cross-border competition does not apply to Finnish pension insurance companies.

One of the basic tenets of the EU is the free movement of goods and services. Therefore, insurance undertakings are entitled to carry out their business anywhere in the EU and, correspondingly, policyholders are entitled to take out a policy with any insurance company operating in the EU. This general rule does not apply to earnings-related pension insurance in Finland.

Agreement on the status of the Finnish earnings-related pension system was reached in 1995, when Finland joined the EU. The Treaty of Accession of Finland was supplemented with a note whereby the Life Insurance Directive enabling cross-border competition does not apply to the pension activities of Finnish pension insurance companies, as provided in the Employees Pensions Act and other relevant Finnish legislation.

The precondition for this was the separation of statutory earnings-related pension insurance from the companies’ other insurance activities. This was done in the strongest possible way in the Act on earnings-related pension insurance companies, which entered into force in 1997. According to the Act, pension insurance companies are only allowed to engage in statutory earnings-related pension insurance. Thus they cannot compete with other insurance companies for other insurance activities.

In accordance with the Treaty on Accession, foreign operators may come to Finland and establish an earnings-related pension insurance company here, or acquire a company that is already in business here.

Backed by the social security character of the earnings-related pension system

Finland’s legal status in the EU is based on the social security character of our earnings-related pension system.

By its legal form, our earnings-related pension is a statutory and compulsory insurance arrangement, which encompasses all employees and self-employed persons. All employers operating in Finland must insure their employees against old age, disability and the death of a family breadwinner. Both the security provided by the earnings-related pension insurance and the insurance premiums paid for it are based on the employee’s wages. Thus, our earnings-related pension system is both statutory and based on an employment relationship.

In many other EU Member States, the statutory pension and the pension based on an employment relationship are managed through different systems.

The Finnish earnings-related pension system is also different from those elsewhere in the EU with respect to the implementation model. In the private sector, earnings-related pensions are managed in a decentralized manner by several competing pension insurance companies, company pension funds and industry-wide pension funds. Competition and decentralization have two purposes: to enable employers’ freedom of choice and to improve the efficient implementation of earnings-related pensions. The public sector has its own pension providers. Pension providers do not seek profit but work to secure earnings-related pensions.

Thus, unlike in many other EU countries, Finland’s earnings-related pension is part of statutory social security. In consequence, earnings-related pension insurance has not been opened for cross-border competition any more than any other aspect of Finnish social security.

Impact of the EU legal status on the activities of pension providers

Due to its legal status in the EU, the Finnish earnings-related pension system must remain clear in the performance of its basic function. Both the State of Finland and the authorized pension providers must comply with the obligations agreed in connection with the EU Accession Treaty. The most significant of these is that a pension insurance company may not engage in activities other than statutory pension insurance.

In addition, pension assets managed by pension providers may only be used to finance and manage goals associated with earnings-related pensions. They must not be used to further other national goals or, for example, to cover other public deficits. For example, the solvency regulation concerning private-sector pension providers should therefore have nothing that would favour domestic investment.

By decision of the Commission, when statistics are compiled, earnings-related pension assets are included in Finland’s public finances. It is important from the point of view of state aid legislation that earnings-related investments are not considered public investments, i.e. as part of the state. It is therefore important that earnings-related pension insurers make their investment decisions independently in all situations and that they are not under the direction of the state’s economic policy.

Another cornerstone of the status in EU law is that all companies engaged in statutory earnings-related pension insurance in Finland must have their head office in Finland. Supervision of pension insurance companies is also in the hands of Finnish authorities. Finland has passed a national law to determine, for instance, how the investments and solvency of pension insurance companies are supervised.

Other EU legislation also applies to us

EU law only applies to life insurance company legislation enabling cross-border competition, but not to other EU law. For example, pension providers are subject to EU laws on competition, as well as other legislation concerning the financial sector, such as investments.

The EU Regulation on the coordination of social security systems applies to earnings-related pensions as a social security pension. The purpose of the Regulation is to coordinate the social security rights, such as pensions, of EU citizens moving between Member States, thereby enabling the free movement of labour.

On the basis of the Regulation, Finnish authorized pension providers are not subject, for example, to the EU Directives on occupational retirement provision (IORP Directives), which create an internal market and standards for employer-specific and trade-specific pension funds.

Established and recognized status

The Finnish earnings-related pension system has an established and recognized status within EU law. The social security aspect of the Finnish earnings-related pension system has been recognized on several occasions after the Accession Treaty and, for instance, when passing various Directives and when the Commission has given answers to some questions posed by Members of the European Parliament to the Commission.

Report on EU rules affecting pension providers

In 2013, we commissioned a study that assessed the conditions of our status in EU law from the perspective of the EU legislation on internal markets and competition law. The key conclusion of the study was that the earnings-related pension system should remain clear and comply with the obligations agreed upon in connection with the EU Accession Treaty as accurately as possible.

According to the study, the European Commission can question the established and recognized position only if Finland itself makes essential changes to the regulation and implementation of the pension system. The better the system can support the movement of labour, the more acceptable it is in view of EU law.