Dispute over pension calculation method unresolved

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In November 2001, the Finnish social partners, pension institutions and government agreed a series of pension and unemployment insurance reforms. The deal left the question of the basis for future pension calculation to be decided by further discussions, with the choice between basing the pension on a person's earnings in their last 10 years at work (as at present), or over their whole employment history. Following the agreement, the trade union confederations took opposing positions on this issue. AKAVA, representing professional staff, and STTK, representing white-collar workers, want to retain the current 10-year period, while the the blue-collar SAK (along with the employers) favours using the whole career as the basis.

Tripartite working groups - involving representatives of the social partners, pension institutions and government - which had been considering the reform of state pensions and unemployment insurance (FI0109101F) reached an agreement on 12 November 2001 (FI0112120N). Some details remain to be finalised, with the key issue of disagreement - the method of calculating future pension entitlements - to be decided by the end of 2008. The benefits of people who have already retired will remain intact, as will that part of current employees' future pension entitlement earned before the pension reform takes effect in 2005. Unemployment benefits will be improved or cut from the beginning of 2003, depending on the age and work history of the individual employee.

Since the agreement was reached, the issue of the future pension calculation method has led to disputes among trade unions

Main points of the agreement

The main points of the November agreement on pensions and unemployment insurance are set out below.

Pensions

• Until the end of 2004, pension entitlements will be calculated in the current way, that is, based on earnings in the last 10 years of employment. Pension rights acquired until the end of 2004 remain intact.

• Attempts will be made to negotiate a single method of calculating pensions before 2005.

• If no agreement can be reached on this point, pensions will be calculated from the beginning of 2005 until the end of 2010 in two ways - either according to the present model or based on the whole working life of the employee. The pension institutions will select the better option for each retiree.

• By the end of the year 2008, at the latest, the one and only model for calculating pensions must be agreed upon. The final calculation model will take effect at the beginning of 2011.

• The final calculation method chosen must guarantee that changing their employment must not decrease an employee's pension, and that people with different working life backgrounds must be treated as fairly as possible.

• From 2005 it will be possible for people to choose when to retire between the ages of 62 and 68.

Unemployment insurance

• Unemployed people will be able to receive the income-related daily unemployment allowance for up to 500 days.

• The daily unemployment allowance for people who have been dismissed for economic reasons or reasons related to production, and who has been at the same workplace for at least 20 years, will be increased by an average of FIM 30 during the first 130 days of unemployment.

• Unemployment pensions (allowing early retirement for long-term unemployed people - FI0104183N) will no longer be available to people born in 1950 or later. If people become unemployed at the age of 57, they will be entitled to the income-related daily unemployment allowance until the age of 65, if they have worked for five years during the previous 15 years.

• The period of employment required for entitlement to income-related daily unemployment allowance will remain at 10 months for people who become unemployed for the first time. However, for subsequent periods of unemployment, the period of employment required to reacquire rights to the allowance will be reduced from 10 to eight months. The period during which the necessary employment to receive the income-related daily allowance can be built up will be extended from 24 to 28 months.

• The conditions for payment of 'mediated' daily unemployment allowance (which depends on a recipient's other incomes) will change so that a recipient can engage in full-time work extending over two weeks without cutting the daily allowance. At present, the limit is four weeks.

The unemployment insurance changes will take effect mainly in 2003.

Dispute over calculation method strains union relations

The dispute over the future pension calculation method is putting a strain on relations between trade unions, and the matter has been postponed to be resolved later on. In the event that a solution cannot be found, then from 2005 until the end of 2010 at the latest, pensions can be calculated either on the present method (based on the last 10 years of employment), or based on the employee's entire work history, depending on which way is better for the retiree. The final decision as to which method will be used has to be made by the end of 2008.

In the recent negotiations, the trade unions split into two camps. The blue-collar Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK) supported a changeover to the calculating method based on the whole work history. This was also the goal of the employers. However, the existing method was supported by the Finnish Confederation of Salaried Employees (Toimihenkilökeskusjärjestö, STTK) and the Confederation of Unions for Academic Professionals (Akateemisten Toimihenkilöiden Keskusjärjestö, AKAVA). They wished to continue basing pensions on the pay levels in an employee's last employment relationship, as careers in the white-collar and professional jobs held by STTK and AKAVA members are generally more stable, with pay levels increasing towards retirement. The method of calculation is a big issue, because at present it is possible for employees to receive very differing pensions, even though the same pension contributions have been paid.

AKAVA considers it important that extra time has been provided to find a method which takes into account also the careers of highly educated persons in all sectors. The approach promoted by STTK and AKAVA favours especially public sector employees whose wage development trend increases up to retirement age, and are in stable employment relationships.

The Employers' Confederation of Service Industries (Palvelutyönantajat, PT) has appealed to the central social partner organisations to reach a quick solution to the calculation question. According to PT, the agreement reached in November is an important overall framework which forms a good basis for constraining the rise in pension costs. However, PT finds it lamentable that the structural reform of unemployment benefit was left only half completed. It wants the duration of unemployment benefit to vary according to work history and age. PT sees it as positive that the age limit for withdrawal from working life has been raised by two years.

The Confederation of Finnish Industry and Employers (Teollisuuden ja Työnantajain Keskusliitto, TT) also supports calculating pensions on the basis of a person's entire employment history.

Commentary

A compromise was reached on the difficult issue of pensions. As a whole, the decisions made were major and far-reaching, one aim being that people can stay longer in working life than at present and that the pressure to raise pension contributions will be decreased. Working for longer is encouraged - the 'carrot' being the significant improvement in pensions for people working after the age of 63, and the 'stick' being the abolition, in the long run, of the possibility to leave working life at age 55, as well as the restoration of the age limit for a part-time pension to the previous level, after experimentation.

From the standpoint of young wage earners who change their employer and are in non-permanent employment, it can be considered justifiable that the calculation method based on the whole working career should be used. As the public sector uses more and more non-permanent employees, there may also be pressure toward a review of policies on this issue within public sector trade unions. The large age cohorts currently in middle age, who were well represented at the negotiation table, retained the right to exit the labour market at the age of 55, since they still have time for such early retirement before the reforms take place. The younger generation will in future pay for part of these people's pensions, too, and will have to remain in working life for a longer time. (Juha Hietanen, Ministry of Labour)