On the other hand, the occupational pension system is the result of separate, if related, developments within different sectors in Finnish society. The result is that for historical reasons there are several pension systems in the country, each of them, however, delivering nearly identical pension benefits; a situation in need of streamlining.

During 2000 it was decided to knit together the two reforms. By November 2001, the employer and employee organisations had reached an agreement on several important issues. Two early retirement options were practically eliminated, as the individual early retirement pension (a form of disability pension with somewhat relaxed eligibility criteria) was abolished except for those born before 1944, and the unemployment pension was transferred to the unemployment insurance system except for those born before 1950.

The terms of part-time pensions were made a bit less tempting; on the other hand, occupational rehabilitation was enhanced.

Beside these measures some carrots were also designed, the most important being the so-called “incentive accrual”, a spectacular pension accrual of 4.5 % per year for those continuing to work between the ages of 63 and 68. This rate is designed to include the effect of postponing the pension as well as the effect of continuing in working life.

As regards the project aimed at a simplification of the overall pension landscape, the only key to a significant simplification is a move from the present final salary system (although the final salary principle is in Finland excercised separately for each employment period) to a system where the pension accrual is calculated for each year separately with regard to the salary and the accrual rate only.

Empirical calculations were performed, showing that no group of employees would suffer more dramatic losses than other groups, and the index used for updating the wages of earlier years was improved. Nevertheless, the white-collar employee organisations put up fierce opposition against the simple career-average salary principle.

A compromise was reached this September on a rule that includes a faint flavour of the final salary principle in the form of an accrual rate increasing with age: from the age of 53 years, the accrual rate will be 1.9% instead of the normal 1.5%, until the incentive accrual of 4.5 % steps into the picture at the age 63. The compromise was accepted by all negotiators, but the trade union for academics voted against it.

Nevertheless, the government proceeded rapidly to prepare a law corresponding to the agreed principles. This law is expected to pass through parliament well before the elections which will take place next March. Most changes will take effect on 1 January 2005.

Surprisingly, other important issues were attacked at the same time. For the last four years some consideration has been given to mechanisms by which the pension level would be automatically adjusted to reflect developments in life expectancy. Now a technique was agreed upon, closely modelled on the Swedish equivalent.

The adjustment is made to the old-age pension when it starts, and should the pension level thus adjusted seem insufficient, the future pensioner can cancel the effect of the adjustment by working some months longer.

Also, it was decided to enhance pre-funding of occupational pensions in Finland, albeit on a very modest scale. This is most welcome, although the funding level of occupational pensions in Finland is already on a comparatively reassuring level, the funds within statutory systems of the private and public sectors taken together exceeding one-half of the GNP.

Altogether the changes will have a considerable effect on the growth of the pension expenditure. The average contribution is expected to rise from its present level of 21% of the salary to some 27% by 2050. The employers will be paying some 20% instead of the present 17%, and for the employees the contribution rate will increase from the present 4.4% to some 7%.

High in themselves, these contribution rates are generally considered feasible, as the Finnish statutory system has no salary ceiling and accordingly no contributions for any supplementary systems will generally be necessary on top of the contributions to the statutory system.

Jaakko Tuomikoski is deputy chief executive officer at Illmarinen. The company’s chief executive, Kari Puro, is chairing the negotiations.

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