Moment of truth approaching in YEL reform

The Ministry of Social Affairs and Health is currently preparing a reform of the Entrepreneur’s Pension Act (YEL). A proposal is expected in time for the Government’s April budgetary session.

“The task is not easy. Business owners have high, and sometimes unrealistic, expectations of the reform. At the same time, the weak state of public finances limits what the reform can achieve. Because of pressures on public finances, the reform must be carried out in a way that does not significantly increase the share of entrepreneurs’ pensions funded by taxpayers,” Mikael Pentikäinen writes in his blog.

Pentikäinen says the YEL model must take into account the wide differences within the business owner community.

“It’s not easy to build a pension system that works equally well across different company forms, from sole traders to employers with hundreds of employees.”

Suomen Yrittäjät, the Finnish SME association, has put forward its own model that recognizes these differences, encourages enterprise and increases the freedom and responsibility of business owners.

“Our model starts from the principle that the YEL contribution should continue to be based on YEL income, which represents an overall assessment of the value of the entrepreneur’s labour input. Despite its shortcomings, this approach reflects the diversity of entrepreneurship and different company forms better than the available alternatives,” Pentikäinen writes.

“The Yrittäjät model would put the pension insurers’ YEL income calculator through the shredder. Too often it has produced arbitrary and excessively high YEL income proposals.”

The model strengthens the role of the entrepreneur’s own assessment and gives business owners sufficient room to determine their YEL income.

“Our proposal also takes into account the salary entrepreneurs pay themselves and the earnings they receive from their business activities when determining the value of their work input and their YEL income.”

“The Yrittäjät model starts from the basic reality that one size does not fit all. We believe it would strengthen business owners’ confidence in the YEL system, which would also be reflected in YEL income levels.”

Strong emotions

Pentikäinen says the YEL system provokes strong reactions.

“This is evident, for example, in how a citizens’ initiative on YEL quickly gathered 50,000 signatures. Many people signed the initiative in the hope that contributions would fall.”

According to calculations by the Finnish Centre for Pensions published in a report by rapporteur Jukka Rantala, the model outlined in the initiative would reduce pension contributions for roughly one in four business owners.

“For most YEL-insured entrepreneurs, moving to a model based on actual income would increase contributions – although it would also improve pension and social security coverage.”

System must be made more efficient

Pentikäinen also calls for greater efficiency in the pension system. Each year, about €60 million of entrepreneurs’ pension contributions goes towards administering the YEL system.

“A natural operator for entrepreneurs’ pensions would be Mela, which could be developed into a pension institution responsible for entrepreneurs’ pensions. In any case, something must be done with Mela as the number of agricultural business owners continues to decline. The Government Programme includes a commitment to examine the issue, but the work has not yet progressed. Hopefully, the review will begin soon.”

“At the same time, it’s reasonable to consider whether entrepreneurs need several pension systems that treat business owners in different sectors in different ways. In agriculture, lower contributions produce a higher pension accrual.”

Read Mikael Pentikäinen’s full blog here.

More YEL-related news can be found here.

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