The Ministry of Social Affairs and Health believes that concentrating yel insurance in a single pension institution would enhance supervision and reduce underinsurance for entrepreneurs.
Social and health Ministry considers concentrating entrepreneurs ‘pension insurance (yel) in one place, possibly the Agricultural Entrepreneurs’ Pension Fund in Melan. Today, entrepreneurs’ pensions are managed by private sector occupational pension companies, such as Varma, Ilmarinen and Elo.
Concentrating entrepreneurial pensions is the latest solution to eradicate underinsurance for entrepreneurs. In recent years, attempts to remedy the situation have fallen into disagreements between different parties.
Underinsurance means that some entrepreneurs pay too little pension contributions in relation to their actual work input. In this way, they also accrue only a small pension.
Underinsurance is possible because, unlike employees, entrepreneurs are able to influence the amount of their earned income and pension contributions with their own declaration. An entrepreneur should estimate his or her earnings as the amount he or she could pay as a salary to someone doing the same job.
Many report their earnings as artificially low so that they would have to pay as little pension contributions as possible. The idea of centralizing insurance would be to monitor more effectively that the earnings reported by entrepreneurs comply with the boundary conditions defined by law.
Underinsurance not only weakens the occupational pensions of entrepreneurs but also pays taxpayers more all the time. Entrepreneurial pensions function entirely as a pay-as-you-go system, ie each year’s pension contributions cover each year’s pensions. By law, the state pays the difference if the pension contributions of the entrepreneurs are not enough to pay the pensions.
Partly due to underinsurance, the state’s share of the cost of entrepreneurial pensions has risen at a brisk pace. From EUR 23 million in 2012, it is estimated to be as high as EUR 423 million next year. The state thus offsets almost a third of the cost of entrepreneurial pensions.
Director of the Ministry of Social Affairs and Health Hannu Ijäs says that most of the increase in the state ‘s share is due to underinsurance. There is no exact calculation.
In addition, as the earnings-related pensions of many entrepreneurs remain small, the state will have to pay them guarantee and national pensions, as well as housing and income support, in the future.
“The Yel scheme is by far the biggest single problem in our earnings-related pension scheme,” says Ijäs, who is leading the preparations for the reform.
According to Ijäs, underinsurance is becoming increasingly clear from the statistics. At the same time as the earnings of employees insured under the tyel scheme have continued to rise, the average yel earnings of entrepreneurs have fallen year by year.
“It’s not credible in any way. It gives a strong indication that underinsurance is becoming more common among entrepreneurs. ”
Ijäksen considers that the current legislation is adequate, but the problem is enforced: occupational pension companies often allow entrepreneurs to set their earnings to a minimum, even though by law earnings should be commensurate with the entrepreneur’s contribution.
The problem is the incentives of occupational pension companies, Ijäs says. Companies compete for customers with each other, so they may not want to blame the entrepreneur’s reported earnings unnecessarily accurately. In addition, companies are encouraged to manage pension insurance as efficiently as possible.
“Efficiency in this case means fast processing, while determining the right job input may require time and precision.”
A monopoly such as the Farmers’ Pension Fund would not have similar distortive incentives. In addition, representatives of several ministries sit on Mela’s board, unlike the boards of occupational pension companies. According to Ijäs, it would be justified for state representatives to be involved in supervising the operation of the yel system, as the state’s share of its costs is already so high.
Ijäs emphasizes that the investigation is still ongoing and Mela is not the only option. In principle, centralization could also take place in Kela, for example.
Interest group Suomen Yrittäjät has opposed several previous reform proposals, but at least it has not yet knocked out the centralization of insurance.
“The proposal is worth exploring. We considered it carefully from the perspective of entrepreneurs. It is clear that the yel system is not working optimally at the moment, ”says the CEO Mikael Pentikäinen says.
If pension insurance were transferred to Mela, for example, Suomen Yrittäjät would probably also have its own representative on the board of the institution for managing occupational pensions. The organization has been dissatisfied with not having the desired representation on the boards of occupational pension companies.