YEL reform – what would change and what would remain the same?
Entrepreneurs and the media have engaged in a lively debate on the reform of the Self-Employed Persons’ Pensions Act (YEL) that was brought before Parliament before Midsummer. As there are some misconceptions in the public sphere about the planned reform, I would like to summarise a few key highlights of what would remain the same and what would change if Parliament decides to maintain the government proposal in its current form.
What was the rationale behind the planned changes?
In early autumn 2020, the Ministry of Social Affairs and Health set up a working group to look into how entrepreneurs’ pension security could be improved in line with the Government Programme. So far, the reform has focussed on how YEL income is determined, because YEL income forms the basis for self-employed persons’ pension contributions, pensions and other social security benefits and determining it is currently challenging from both entrepreneurs’ and pension companies’ perspectives. The working group’s primary goal has been to reduce underinsurance among entrepreneurs, which occurs when an entrepreneur’s YEL income is too low in relation to the value of their actual work input.
According to the survey carried out by the Finnish Centre for Pensions, underinsurance has increased especially in recent years. Since 2014, the average YEL income has clearly decreased in relation to the development of the general earnings level, particularly in younger age groups. In 2021, entrepreneurs’ average annual YEL income was EUR 21,600 and, for more than a third of entrepreneurs, it was less than EUR 10,000.
The correct level of YEL income is important for the self-employed persons themselves, because it serves as the basis for determining not only their future old-age pension, but also their other social security benefits, such as sickness and parental allowances. Pension insurance also provides security in the event of unemployment and the death of a family provider.
State’s share of pension payments is growing
Current YEL pensions paid to entrepreneurs are financed using the YEL contributions collected from self-employed persons during the same year. That means that no investable fund accumulates for YEL pensions. The State pays the share of YEL pensions that the YEL contributions do not cover. The State’s share of the costs has risen from EUR 100 million to EUR 350 million in 2010–2020.
The Finnish earnings-related pension system is essentially based on each person accruing their own pension with their own work. It seems that some of the practices established in the area of YEL income in recent years are leaving a large proportion of entrepreneurs without a sufficiently high level of pension security to secure their income. The risks of insufficient income will ultimately be borne by tax payers, who will have to pay the costs of national pensions and other social security benefits. The government now proposes that self-employed persons themselves pay for a pension that corresponds to their actual work input.
The concept of YEL income remains unchanged, but will be defined in more detail
The concept of YEL income remains unchanged. YEL income still refers to the salary that an entrepreneur would reasonably have to pay to a person with comparable professional skills to perform their entrepreneurial activities. With the current concept of YEL income, it is perfectly logical that the median salary of workers in the entrepreneur’s sector be used as the basis for determining YEL income.
However, contrary to the fears expressed in the public debate, the legislative reform does not involve equalising in the sense that YEL income would be determined solely based on the sector’s median salary.
Entrepreneur-specific consideration will remain intact and entrepreneurs will still be heard
The legislative proposal clearly states that YEL income must be determined on an individual basis and that the determination must also take into account other information related to the value of the entrepreneur’s work input, such as the amount of work input, the scope of the entrepreneurial activities and the professional skills of the entrepreneur. It is in the best interests of entrepreneurs that the Act includes more detailed provisions on the individual determination of YEL income and practices to implement their pension cover on an equal footing.
Also going forward, pension companies will hear entrepreneurs and ask them for information that affects the amount of YEL income. Pension companies will consider the overall situation of entrepreneurs when confirming their YEL income. The overall consideration includes the requirements of the Self-Employed Persons’ Pensions Act, the information provided by the entrepreneur, information on the entrepreneurial activities obtained from public registers and the Finnish Centre for Pensions’ application guidelines for the Self-Employed Persons’ Pensions Act. This gives entrepreneurs individual leeway when it comes to their YEL income.
Entrepreneurs cannot determine their YEL income themselves
The YEL reform involves specifying in more detail the criteria used by pension companies when confirming income under YEL insurance. The legislative amendment will not change the fact that the pension company is the party that confirms the YEL income. The Finnish Financial Supervisory Authority (FIN-FSA) stated in June 2021, after supervising pension companies’ practices in confirming YEL income, that pension companies have transferred too much responsibility for the level of YEL income to entrepreneurs, which is against the regulations. FIN-FSA requires pension companies to use more discretion when confirming entrepreneurs’ YEL income.
The biggest change concerns pension companies’ obligation to adjust YEL income regularly
As a general rule, self-employed persons’ YEL income is currently updated in two situations: when the self-employed person applies for a change in it and through the wage coefficient applied to it by pension companies at the end of each year. In practice, maintaining the YEL income is thus largely the entrepreneur’s responsibility. The legislative reform requires that pension companies adjust the YEL income levels regularly every three years. Pension companies present entrepreneurs with a proposal in writing to which entrepreneurs are expected to react within the specified time frame. The entrepreneur can complement the proposal by giving supplementary information on the level of their YEL income.
Better grounds for YEL income decisions
Pension companies’ YEL income decisions are important for self-employed persons from the perspective of their income, as YEL income has a broad impact on a self-employed person’s social security. YEL income is confirmed based on the definition of YEL income provided for in law and the overall consideration based on it. When making a decision requires weighing various aspects and carrying out an overall assessment, the grounds for the decision become all the more important.
That is why the legislative amendment requires that better justification be provided for YEL income decisions and the information used for them in the future. The change dissipates doubts concerning the criteria for determining YEL income by increasing the transparency of the decisions. Clearer grounds also make it possible to monitor the consistency of pension companies’ YEL income practices.
For Ilmarinen, it is important to act responsibly in implementing self-employed persons’ pension security
For Ilmarinen, it is important to see to it that self-employed persons have a sufficient level of pension security as required by legislation. The Finnish system where entrepreneurs’ pension contributions and cover are determined based on estimated YEL income instead of taxable income is exceptional in an international comparison. The YEL amendment clarifies the concept of YEL income and its criteria, which makes it easier to determine the YEL income and maintain it at the right level.
Pension companies will not benefit financially from the increase in the level of YEL income or from higher YEL contributions, because the YEL contributions will be used to pay the pensions of self-employed persons who have retired. The administrative cost component to be used for pension companies’ operating costs is tied to the number of YEL insurance policies.
Ilmarinen’s goal is to improve the pension security of its self-employed customers. Self-employed persons deserve the same level of pension and social security as employees right from the start of their career as entrepreneurs. Our specialists advise entrepreneurs actively on how to set their YEL income on the right level at the start of their career and how to keep the YEL income up to date. We work every day to ensure that self-employed persons perceive good service as Ilmarinen’s greatest asset.
Minna Hakkarainen
Director, Insurance Services
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