Direct pension promises
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Direct pension promises refer to promises made by employers to personally pay and manage their employees’ supplementary pensions. These kinds of pension schemes have sometimes also been called employers’ pension promises or supplementary pension schemes based on bookkeeping reserves. The key feature of these schemes is that the workers’ supplementary pensions are not provided by a third party such as a life insurance company, a company pension fund or an industry-wide pension fund. Instead, they are based on an agreement between an employer and their employees or a promise made by the employer unilaterally to pay a supplementary pension to their employees after they retire.
As the schemes require employers to assume the liability for paying the pensions themselves, there is an inherent risk that the employer is not able to make the payments when the time comes. However, employers have a legal obligation to safeguard at least half of the amount of their pension liability in the event of liquidation or restructuring.
The authority responsible for the enforcement of the law across the country is the Division of Occupational Safety and Health of the Regional State Administrative Agency for Southwestern Finland.
Employers have a duty to disclose the amount of their supplementary pension liability and the steps taken to safeguard it to their employees and other beneficiaries once a year. If an employee or a beneficiary suspects that an employer has neglected their safeguarding obligation or if the employer fails in their disclosure obligation, the employee or beneficiary can ask occupational safety and health authorities to investigate.
Occupational safety and health authorities have the power to issue improvement notices to employers who have neglected either their disclosure obligation or the safeguarding obligation. Occupational safety and health authorities can threaten to fine any employers who fail to act on improvement notices.
Safeguarding pension entitlements based on direct pension promises
Employers’ safeguarding obligation
Employers have a legal obligation to safeguard at least half of the amount of any pension liability that they have on the basis of direct pension promises in the event of liquidation or restructuring. The law calls this a ‘safeguarding obligation’.
Employers can fulfil their safeguarding obligation
- by taking out insurance, such a credit and surety insurance, to cover the pension liability
- by putting up collateral to cover the pension liability (the collateral can also be a bank guarantee), or
- in some other similar manner that genuinely safeguards their employees’ right to a supplementary pension in the event of liquidation or restructuring.
A combination of the aforementioned means can also be employed.
The safeguarding obligation is also considered to have been fulfilled if the employer has arranged to pay at least half of the supplementary pension benefit that employees have been promised through group pension insurance, personal pension plans, a company pension fund or an industry-wide pension fund and the rest in the form of direct pension promises.
What kinds of employers are bound by the safeguarding obligation?
The safeguarding obligation applies to all employers who have made direct pension promises and who can be declared insolvent. This therefore includes natural persons, limited companies, non-governmental organisations, foundations and other kinds of legal persons. The safeguarding obligation does not apply to
- the central government
- the Åland Islands
- joint municipal authorities or other public municipal cooperatives
- state enterprises
- independent public bodies
- the Evangelical Lutheran Church of Finland and the Orthodox Church of Finland
- individual parishes or parish unions of the Evangelical Lutheran Church of Finland and the Orthodox Church of Finland.
Exemptions from the safeguarding obligation
Based on the safeguarding obligation, employers have a duty to safeguard at least half of the amount of any pension liability that they have on the basis of direct pension promises. However, there are certain circumstances in which there is no safeguarding obligation even if an employer has promised to make direct pension payments to their employees or other beneficiaries.
- The safeguarding obligation only applies to direct pension promises that are based on work performed under an employment contract. In other words, managing directors’ and self-employed persons’ pension schemes are exempted.
- Only the portion of any supplementary pensions promised that is payable after employees reach retirement age needs to be safeguarded. In other words, the safeguarding obligation does not apply to early retirement.
- The safeguarding obligation also applies to direct pension promises that are used as a basis for paying a supplementary pension upon the death of an employee to his or her widow or widower or a child below the age of 18. In the case of pensions that pass on to other beneficiaries, the safeguarding obligation ends upon the death of the employee.
Circumstances that trigger the safeguarding obligation and circumstances that release an employer from the safeguarding obligation
The safeguarding obligation is triggered as soon as an employee or another beneficiary becomes entitled to a supplementary pension that is independent of future events or circumstances on the basis of a direct pension promise. There is no safeguarding obligation if the right to a supplementary pension is conditional. If, for example, employees only become entitled to a supplementary pension once they have worked for their employer for 20 years, their right to the pension only becomes independent of future events or circumstances once that milestone is reached. The right to a supplementary pension is often established years before the employer’s obligation to make payments begins.
The safeguarding obligation remains in place until the employer’s obligation to make supplementary pension payments ends or they are released from their pension liability otherwise.
Employers’ obligation to disclose information to employees and other beneficiaries
Once an employer’s safeguarding obligation has been triggered, they become liable to provide their employees and other beneficiaries with a written record of the amount of their pension liability and of how the safeguarding obligation has been fulfilled once a year. The information must be disclosed within four months of the end of each financial year.
The disclosure obligation is inherently linked to the safeguarding obligation. In other words, the disclosure obligation does not take effect until an employer’s safeguarding obligation is triggered. The safeguarding obligation, on the other hand, is triggered as soon as an employee or another beneficiary becomes entitled to a supplementary pension that is independent of future events or circumstances on the basis of a direct pension promise.
Employers have a duty to let their employees and other beneficiaries know of any significant changes in the collateral value, the insurance coverage or other circumstances related to the fulfilment of the safeguarding obligation as soon as such changes become known.
Direct pension promises made before 1 April 2015
Employers’ right to request relief from their safeguarding obligation
The Act on Safeguarding Direct Pension Promises in the Event of Employer Insolvency entered into force on 1 April 2015. Employers can ask occupational safety and health authorities to release them from the safeguarding obligation in respect of any direct pension promises that were made before the entry into force of the Act if payments under these schemes have already begun. Any such exemptions are always granted for a fixed period not exceeding two years at a time. An exemption can be granted if
- it can reasonably be considered that the employer’s financial standing covers the pension liabilities associated with their direct pension promises and
- the beneficiaries of the direct pension promises give their consent.
The Finnish Ministry of Economic Affairs and Employment has prepared a special form for applying for such exemptions (Application for an exemption from the safeguarding obligation provided for in section 2 of the Act on Safeguarding Direct Pension Promises in the Event of Employer Insolvency (209/2015)).
Applications must be accompanied by
- the beneficiaries’ written consent to the exemption
- a copy of the direct pension promise or the terms of the supplementary pension scheme
- a statement showing the amount of pension liability based on the direct pension promise and the calculation criteria
- copies of the employer’s confirmed financial statements covering the three most recent financial years
- the employer’s credit report containing the data held about the employer in the Finnish Trade Register and including information about methods of payment and any payment defaults as well as the employer’s credit score, where available
- evidence of tax payments, if the applicant is a natural person, and
- evidence of the existence of a statutory pension insurance policy and the payment of pension insurance contributions.
The credit report and the evidence of tax payments and the existence of a statutory pension insurance policy must be no more than three months old.
Applications for exemptions are processed by the Division of Occupational Safety and Health of the Regional State Administrative Agency for Southwestern Finland.
The provisions of the Act on Safeguarding Direct Pension Promises in the Event of Employer Insolvency only apply to direct pension promises made before the entry into force of the law as of 1 April 2016.
The provisions on employers’ safeguarding obligation entered into force on 1 April 2016. The first written record required under section 4 of the Act had to be issued within four months of the end of the first financial year that ended after 1 April 2016.
For example, in the case of employers whose financial year runs from 1 January to 31 December, the first financial year that ended after the entry into force of the Act ended on 31 December 2016. The first written record to employees had to be issued within four months of the end of that financial year, i.e. by 30 April 2017.
An employer or their representative who wilfully or through gross negligence
- provides false information in the course of satisfying their disclosure obligation or neglects their disclosure obligation, where this act is likely to lead to a person who is entitled to a supplementary pension failing to receive information about the failure to satisfy the safeguarding obligation, or
- ignores a request from occupational safety and health authorities concerning their safeguarding obligation or disclosure obligation
can be fined for a violation of the provisions on the safeguarding obligation, unless a more severe punishment is provided for elsewhere in the law.
In such cases, the allocation of liability between the employer and their representative is based on the provisions of chapter 47, section 7 of the Criminal Code of Finland (39/1889).