New YEL pension model examined: SY lists pros and cons of the Government Bill

The Government submitted a Bill to Parliament on 8 October containing proposed reforms to the entrepreneur’s pension system (YEL). One of the key aspects of the Bill is that business owners would in future be able to choose whether to base their pension insurance on the current YEL income model or on their actual, taxable earned income.

“Suomen Yrittäjät regards the proposed reform as a compromise reached under difficult circumstances, partly intended to reflect the different situations of business owners.” The goals of giving business owners more choice and making pension contributions more reasonable are important and worthwhile,” says Atte Rytkönen-Sandberg, a Vice President at Suomen Yrittäjät, the Finnish SME association.

“The Bill does, however, contain inflexible provisions and ambiguities that threaten the reform’s objectives and make it difficult for business owners to navigate.” “Nor does the Bill give business owners enough control over their own level of pension and social security cover.”

The Government previously announced plans to examine the prefunding of the YEL system and measures to reduce its administrative costs.

“Work on these reviews and measures must be launched promptly, during this parliamentary term,” Rytkönen-Sandberg says.

Below is an overview of how the Bill in its current form would affect business owners. Suomen Yrittäjät experts Atte Rytkönen-Sandberg and Harri Hellstén, Labour Market Affairs Manager, assess the details of the Bill.

1. When will the changes take effect?

The Government has submitted its Bill to Parliament, which will debate it and decide whether to pass it during the autumn. The final content of the Bill may yet change during the parliamentary process.

The changes are slated to come into effect on 1 April 2028, with the proviso that business owners could choose their contribution calculation method – either the current YEL income model or actual earned income – from the start of 2028.

2. How would YEL income and YEL contributions be determined in future?

Under the Bill, business owners would in the future be able to choose as the basis for their YEL income either (1) an overall assessment based on the current YEL income model or (2) their actual earned income from business activities:

Under the overall assessment model, a pension provider would determine the business owner’s YEL income using the same assessment method as under current law. However, the YEL income must be at least 50% of the business owner’s actual earned income (with a phased transition from 30% to 50% between 2028 and 2032). The pension provider checks annually that the business owner’s YEL income is at least 50% of their earned income and, where necessary, adjusts the business owner’s YEL income accordingly.

The earned income model would use the business owner’s earned income from business activities as recorded in the Incomes Register, or the earned income established in the most recently completed tax assessment, excluding dividends taxed as earned income. However, the YEL income must be at least equal to the minimum threshold for the insurance obligation (€9,423.09 per annum at 2026 levels). The pension provider checks the business owner’s earned income annually and adjusts their YEL income accordingly.

Under the earned income model, for business owners operating through a limited company, the relevant figure would in practice be salary paid by the company. For sole traders, it would be the portion of their business income taxed as earned income.

Business owners would need to commit to their chosen basis for YEL income – either the overall assessment or earned income – for three years. Every three years, they would have the opportunity to choose their basis again, at which point the YEL income would be re-determined. In addition, if a business owner had chosen the earned income model, they could switch to the overall assessment model following a material change in their circumstances. In that case, the pension provider would carry out a new assessment of the YEL income, taking the materially changed circumstances into account.

The insurance obligation – that is, whether a business owner is required to take out YEL insurance – would continue to be assessed on the basis of the value of the labour input, i.e., the overall assessment. If a business owner were obligated to take out YEL but their earnings were below the minimum threshold for that obligation and they chose the earned income model, their YEL income would still have to be at least the threshold for the insurance obligation, i.e., €9,423.09 per annum (at 2026 levels).

3. What impact would the change have, and what would it mean?

The impact of the Bill would vary from one business owner to another. If the current YEL income is higher than actual earned income, switching to the earned income model could reduce pension contributions. If, on the other hand, the current YEL income is low relative to earnings, contributions could rise. Comparing the current YEL income with earned income from business activities could help determine which model is the better fit.

At the same time, it is important to bear in mind that YEL income affects not only their pension but also their other social security benefits. A lower YEL income and lower pension contributions also mean a smaller pension accrual and reduced social security benefits, such as sickness and parental allowances.

4. Easing the contribution flexibility rules

The Bill also proposes changes to what is known as contribution flexibility – that is, the option to pay a reduced earnings-related pension contribution. The Bill proposes increasing the flexibility margin to 25% and removing restrictions on both reduced and additional contributions, giving more business owners access to the scheme.

In the future, business owners could temporarily reduce their contributions by 10–25% by notifying their pension company in writing. The contribution could not, however, fall below the YEL minimum threshold and the minimum contribution level.

The flexibility option could be activated from the beginning of the second month following the notification and would continue until the end of the same calendar year. It could not be applied retrospectively. Downward flexibility could be used for a maximum of three years within any seven-year period.

5. Start-up discount set to be scrapped

The start-up discount currently in force is proposed to be scrapped. Instead, new business owners would in future have access to the improved contribution flexibility scheme.

An already granted start-up discount could, however, be kept in place if the business owner wishes. A business owner receiving the start-up discount would not additionally be entitled to the contribution flexibility proposed in the reform (the procedure under current rules would apply).

Read also: A rapporteur appointed to review prefunding of YEL

Suomen Yrittäjät lists the pros and cons of the reform

Suomen Yrittäjät’s Atte Rytkönen-Sandberg and Harri Hellstén have listed the pros and cons of the Government’s YEL Bill.

POSITIVE FEATURES IN THE BILL:

1. The principle of expanding freedom of choice is a step in the right direction. The approach adopted for reforming the system is a compromise reached under difficult circumstances, partly intended to accommodate business owners’ differing circumstances.

2. Dividend income (excluding work-based dividends) would not be used as the basis for earned-income insurance. Dividends are returns on capital, and it is essential to keep the pension system separate from dividend taxation.

3. One welcome aspect of the further work on the Bill is the effort to ensure that YEL income under the earned income model is based on the most up-to-date information possible. For business owners trading through a limited company, this means that the data would come from the Incomes Register and the basis for insurance would be the income from the preceding 12 months (at the time of confirming the YEL income).

4. The reform gives business owners trading through a limited company greater scope to influence the level of their pension and social security coverage and their pension contributions if they choose to base their insurance on earned income.

5. The downward flexibility in YEL contributions (reduced earnings-related pension contribution) would be increased to 25% and restrictive criteria would be scrapped to grant more business owners access to the scheme. This would give business owners more scope to adjust their pension contributions. The Bill should nevertheless be amended to allow contributions to be adjusted retrospectively, as is currently possible.

6. The lower threshold for compulsory insurance would stay at its current level. It would not be lowered – which would have made part-time entrepreneurship more difficult. However, it would not be raised either, as Suomen Yrittäjät has proposed.

CHALLENGES IN THE BILL:

1. The Bill contains many rigidities and ambiguities that threaten the reform’s objectives and make it complicated for business owners to apply it in practice.

2. The Bill does not fully give business owners sufficient control over their own level of protection. For the model’s objectives to be met, it must also be easier to apply for changes to YEL income than the proposal currently allows.

3. The reform would also treat business owners unequally depending on the legal form of their business.

4. For sole traders, another problem is that the proposed model would also rely on the most recently completed tax assessment, meaning their YEL income could be based on earnings from as long as two years earlier.

“Sole traders cannot pay themselves a salary. In practice, no more up-to-date information on sole traders’ income exists in any register – nor is there any information that could, for example, be entered into the Incomes Register.”

“A further challenge for sole traders is that the entire profit of the business is taxed as the owner’s personal income. A sole trader with employees could therefore end up paying pension contributions on value generated not only by their own labour but by others’ as well.”

5. One positive feature of the proposed overall assessment model is that pension providers would have to show business owners their assessment and explain the reasoning before the owners choose how their YEL income will be calculated. Business owners would also have an opportunity to submit additional information that could affect the assessment. This is not enough, however.

“The Bill should require pension providers to explain clearly how they have assessed a business owner’s YEL income and give the owner a genuine opportunity to influence the outcome by providing additional information.”

“The law should also describe more clearly how the value of a person’s labour input is assessed in practice. It’s essential that the reform addresses the use of the YEL calculator, a tool that’s been regarded as unreasonable.”

6. The start-up discount would be removed. This would also make things harder for new business owners. Any start-up discount already granted could, however, remain in force if the business owner wishes.

7. The behavioural effects of the proposal may be unpredictable. The real impact can only be assessed once the reform takes effect and its consequences become apparent in practice.

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