8 questions and answers from our info session about the YEL pension reform

Suomen Yrittäjät held a webinar about the YEL entrepreneur’s pension reform on Monday 15 August. Around 440 business owners attended the information session via Teams.

At the event, Harri Hellstén, labour market affairs manager at Suomen Yrittäjät, said that Suomen Yrittäjät believed that the controversial bill to amend the Entrepreneur’s Pension Act needed to be refined further.

For many years, Suomen Yrittäjät have demanded that the entrepreneur’s pension system, which dates from the 1970s, be overhauled more extensively than is currently being proposed.

“The idea behind the YEL system is that a business owner pays into their future pension even when their business’s fortunes vary and that the level of security is equivalent to that of employees to prevent large differences between business owners and employees in retirement. By law, a business owner’s pension provider must set a stated income for YEL purposes (“YEL income”) which corresponds to the value of the business owner’s work input. By law, the value of the business owner’s work input must match the salary that the business owner would have to pay an external, equally skilled person to do the same work in the business as the owner,” Hellstén explains.

Behind the reform is, in particular, a thematic review by the Financial Supervisory Authority in summer 2021 on pension providers’ actions in the definition of YEL income. The thematic review found that pension providers had been merely confirming YEL incomes based on entrepreneurs’ information alone, even in cases where the stated amount could not credibly have covered the costs of hiring a similarly skilled person for the job in question. The pension providers have already begun reviewing their YEL practices and contacting business owners with the purpose of resetting their YEL incomes at a statutory level.

“The primary aim of the current proposed amendment is to support the application of the law by pension providers. The goal is for all pension providers to operate in the same way and for the level of security to be the same regardless of which provider an entrepreneur chooses. On the other hand, from a competition perspective, business owners should enjoy a level playing field. Entrepreneurs in the same sector and contributing the same amount of labour should pay the same pension contributions to prevent a company that pays less from gaining a competitive advantage,” Hellstén says.

State’s share of pension expenses rising

Hellstén pointed out at the online event that the Finnish state is currently paying around 30% of entrepreneur pension expenses. This percentage has been rising in recent years.

“The conversation has often pointed out this rise in the state’s share and how increased YEL income and thus also increased pension contributions being paid in will reduce the burden on the state. This is indeed true in the short term, but in reality the new pension liabilities that are created just shift the upward pressure into the future, instead of solving the ‘problem’.

Suomen Yrittäjät has proposed investigating the possibility of using a fund in the entrepreneur pension system. A small proportion of the employees’ pension system has been funded since the start.

“In practice, building a fund into the current system could be a very expensive solution. It would mean an initial sum in the billions of euros which would be necessary to place funding on a sufficient level. However, it would be important to calculate and examine this question in detail,” Hellstén said at the online event.

Untraditional legislative process

A working group deliberated reform of the YEL system in the last parliamentary term. However, the Bill now being proposed by the Government is not a direct continuation of that work. The Bill was drafted by civil servants in the Ministry of Social Affairs and Health. An expert group, of which Suomen Yrittäjät was part, contributed to the drafting of the legislation. 

“Because the working group was not officially invited to support the drafting, it was not given an assignment or an official goal for the work. Nor did the working group write a report which could have included a minority opinion and which could have been the subject of broad consultation. In that way, the public discussion could have happened at that stage, not when the Bill was already before Parliament. In departure from the normal process, the Ministry did not arrange broad consultation about its draft Bill; instead, it just consulted the Financial Supervisory Authority, with very little notice,” Hellstén continues.

In departure from the normal process, the Ministry did not arrange broad consultation about its draft Bill; instead, it just consulted the Financial Supervisory Authority, with very little notice.

Harri Hellstén

However, Suomen Yrittäjät decided to submit its opinion on the Bill, even though it was not specifically asked for one. Even though Suomen Yrittäjät supports the Bill’s aims of improving entrepreneurs’ social security and harmonizing the application of the Entrepreneur’s Pension Act, the organization believes there are areas for improvement.

“We would particularly like to see refinements to the grounds for the Bill when it comes to defining YEL income, using median wages, and consideration for the entrepreneur’s own statement when confirming the YEL income.”

Median wages only a part of overall consideration

At the online event, Hellstén stressed that the Bill was not changing the basic idea of insuring the value of the labour put in by the entrepreneur. He said that the most common misconception regarding the reform is that a YEL income would be set for everyone automatically based on the median full-time wages for employees in each sector.

“Under the Bill, in addition to median wages in the sector, pension providers would have to consider all information regarding the work put in by the entrepreneur, professional skill, and labour contribution when setting a YEL income. It would be an overall consideration of which medium wages are just a part.”

In its opinion, Suomen Yrittäjät hoped the grounds for the Bill would be refined to remove the search for median wages from the very centre of considerations, as median wages cannot always be defined.

“In addition, we proposed raising the value of the information provided by the entrepreneur so that the figure they give is generally believed, unless it is clearly contradicted by another information source being used,” Hellstén says.

Checks of YEL income every three years

Discussion has been raised concerning the impact the amount the YEL income will have on small-scale entrepreneurship. Hellstén assuages the worst fears.

“The YEL floor is not being raised. If the entrepreneur’s business is small or the value of the labour contribution is low for some other reason, the YEL income will of course not be set according to the sector’s median wages but lower, according to the entrepreneur’s labour contribution, just as now.” 

If Parliament passes the proposed Bill, pension providers will be obliged to review YEL income at intervals of three years. The Bill is intended to become law at the start of 2023. During the first year, employment pension providers would review all YEL incomes of under €15,000, excluding those that have been reviewed in the past three calendar years.

The Bill is intended to become law at the start of 2023.

“The higher YEL incomes will be checked in 2024 and 2025, if they have not been reviewed for three years. It’s worth remembering these deadlines when you’re thinking about when to expect word from your pension provider after the Bill becomes law,” Hellstén says.

According to the Bill, the first review of a YEL income after the Bill becomes law would be allowed to lead to an increase of €8,000 or 20% in the YEL income, whichever is greater. For those paying according to the minimum YEL income, the monthly pension contribution would thus double from €170. The next review by the pension provider would be done three years after the first one.

Hellstén says that the failure of the Bill to be enacted would not necessarily be very good news for entrepreneurs.

“If the Bill is not enacted, the current pension legislation would remain in force. The pension providers would still face pressure to review low YEL incomes and bring them up to the statutory level, as the regulator has warned them about it. At present, the Act does not set limits for increases; the basic premise is that the pension provider must always set the YEL income to match the value of the labour contributed by the entrepreneur.”

Business owners can appeal decisions

If a business owner is unsatisfied with the YEL income set by a pension provider, he or she can appeal in writing within 30 days to the Pension Appeal Board. This is an appeal body that is independent of pension providers and the Finnish Centre for Pensions.

“Under the Bill, your pension provider would have to justify its YEL income decisions, or in other words, tell you what factors it considered and what basis it used for setting your YEL income at the level it did. This would increase business owners’ legal protection,” Hellstén says.

Questions from business owners about the YEL reform at the online event

Will the increase only come into force after the decision or will a pension provider be able to claim YEL contributions retrospectively?

The basic premise is that when it comes to decisions made after the Act enters into force, the new YEL income would be set from the decision date onwards.

Single-person business owners are often very busy and may work 40–80 hours a week. However, they only pay themselves €2,000 a month in salary. Should the YEL income be set in accordance with a CEO’s median salary and in principle double if the working time is 80 hours a week?

A pension provider must set a YEL income which corresponds to the value of the business owner’s work input. The Bill refers to the median wages of the sector, not the specific job. CEOs’ salaries would thus be part of the sector’s wages used to define the median. In addition to the median, the pension provider must consider all available facts about the entrepreneur’s labour contribution and its value and decide on balance on the salary that would reasonably have to be paid to an external person to perform the entrepreneur’s work.

Annual reviews would take annual variations better into account. Why were reviews every three years decided on?

The three-year review is only an obligation on the pension provider. A business owner can at any time ask for his or her YEL income to be reviewed to bring it into line with his or her contributed labour. After every review, a new three-year period begins, after which the pension provider is obliged to review the level of the YEL income again.

Where can I find each area’s median wages?

Median wages are not listed anywhere. Suomen Yrittäjät would like to see the definition of median wages included in the Bill.

Why is a median YEL income a better measurement in setting pensions than turnover?

By law, the entrepreneur’s YEL income must match the salary that the business owner would reasonably have to pay an external, equally skilled person to do the same work in the business as the owner. An overall consideration that includes, in addition to median wages, proof of the employment provided by the business, the owner’s labour contribution and its value are refinements to the Act’s current stipulations. Turnover, on the other hand, is rarely precise enough proof of the value of the business owner’s labour contribution.

If I own three companies in three different sectors and draw salary from all of them, which one is used to define the median?

If you operate in different sectors, one joint YEL income is calculated in accordance with the value of the labour contribution in each sector.

Why is YEL income, rather than turnover or the business owner’s “real” income, used to define YEL income?

Turnover is not a very good description of the business owner’s labour contribution, except for single-person businesses in the service sector, but not always in that situation, either. If we speak of wages alone, the question arises of what to do with sole traders who do not draw salary and whose incomes do not appear in the Incomes Register. If the criterion were wages or salary, we would have to think about how a link to wages or salaries would start to affect businesses’ decision, such as the business entity they operate under and whether it is right for the pension system to nudge choices about business entity and taxation.

How will the YEL reform affect part-time entrepreneurs?

If someone runs a business on the side and only puts in a small number of hours, the reform should not have any effect. If the hours of contributed by the entrepreneur to the business are low, the YEL income should also be low, in accordance with the value of the labour contributed.

Questions answered by Harri Hellstén of Suomen Yrittäjät.