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Over 70% of business owners accept suggested new YEL income

Less than 11% of the business owners under review did not accept the proposed new YEL income from their pension provider.

Last year, the law obliged pension providers to review the incomes for YEL pension purposes or “YEL incomes” of less than €15,000. Fresh data from TELA, the Finnish Pension Alliance, an association of pension providers, shows that 56,000 business owners were subject to these reviews. For 83% of them, YEL income rose.

A very small share of business owners saw their YEL income fall. Such people accounted for less than 0.5%. Around 2% (1,181 business owners) voluntarily chose to raise their YEL incomes by more than the maximum increase the law allows the pension providers to raise it.

The business owners whose YEL incomes went up had had YEL incomes of under €15,000 which had not changed significantly during the past three years.

YEL incomes were reviewed because of the legislative amendment in force since the start of 2023. It obliges pension providers to review business owners’ YEL incomes.

“The aim of the amendment was to make business owners ensure they had high enough pension coverage. The inspections mean that YEL incomes will now increase in accordance with the law. This will ensure business owners’ pension security and other social security linked to their YEL incomes,” Janne Pelkonen, Public Advocacy Manager at TELA, says.

Maximum increase of €4,000

When a business owner is under-insured, their YEL income does not match the value of the labour they put into their business. Under the Entrepreneur’s Pension Act, the YEL income must match the annual salary that would be paid for the same work with the same professional skills. This principle did not change when the Act was amended.

The YEL income determines the level of old-age and disability pension, as well as benefits like sick pay, parental allowance, unemployment benefit and housing allowance.

The amendment to the Entrepreneur’s Pension Act includes a provision which significantly affected how YEL incomes were reviewed in 2023. It stipulated that pension providers could only raise YEL incomes by €4,000 annually at a time. In terms of the YEL payments that the business owner pays, that works out as around an additional €85 per month.

For around 73% of the business owners reviewed, their YEL incomes rose by the maximum amount. For some, a smaller increase was enough to match their YEL incomes to their actual labour input, while others chose another amount in the range of the proposed YEL income increase. A small number chose to increase their YEL incomes by an amount higher than the €4,000 provided for by law.

Pelkonen says that the tone of the feedback about YEL income reviews has been moderate.

“In the end, pension providers received relatively little feedback from business owners, even if some of it was strongly worded. The statistics show that the reviews went well. When the legislation was amended, the reviews were made more reasonable through a maximum increase and by spreading the reviews out. This probably reduced the amount of feedback.”

Pelkonen says that some business owners’ pension and social security is still not at the correct level even after the first increase. That means they could face a fresh increase on the next review in three years.

The Finnish Centre for Pensions has predicted that in 2023 around €1.2 billion in YEL payments would be collected, and that around €1.7 billion would be paid in pensions and other payments. The state subsidizes the shortfall of around €500 million.

“When the legislation was amended, preliminary impact assessments were made of the increase in YEL incomes, and it appears that under-insuring is going to decline in line with targets. Time will tell how the total amount of YEL incomes and payments collected will perform following the legislative amendment and as the reviews continue in the next few years. In terms of the effect of the amended law to payments collected, maybe we can at this stage talk about tens of millions of euros annually, but of course other factors also affect the total level of payments collected,” Pelkonen says.

This year and next year, the reviews will turn to higher YEL incomes, but the provision limiting maximum increases will slow down the elimination of under-insuring.

“If YEL incomes rose, that would strengthen the public finances over the coming decades, mainly because the state would have to subsidize pension expenses less. In the very long term, the situation will change in the 2060s when better entrepreneur pensions are paid. Because business owners’ YEL payments are not used to fund future pensions, financing pensions in the long term is challenging in any event.”

Criticism of the YEL calculator

Less than 11% of the business owners under review did not accept the proposed new YEL income from their pension provider. They provided additional information about their businesses.

Surveys by Suomen Yrittäjät, the Finnish SME association, show that business owners’ most often have negative feedback because of their weak financial standing and the data on which the proposed new YEL income is based.

When the pension providers propose new YEL incomes, they use a calculator developed by the pension sector. We’ve previously reported on criticism of the problems in the calculator used in YEL income reviews.

“The calculator is a good aid when reviewing YEL incomes, but it too should be developed,” Pelkonen says.

The electronic calculator is an aid for pension providers and business owners. It is intended to provide the correct approximate level of YEL income. It does so by using businesses’ turnover data from the Tax Administration, median salary data from Statistics Finland, and information on the salaries of similar professionals to the business owners from the Finnish Centre for Pensions income register. Business owners and pension providers noticed faults in the turnover estimates and company data. The YEL income proposals have sometimes included incorrect company data or have indicated the incorrect sector. Business owners also responded to the proposals by stating that they run their businesses part-time. The Finnish Centre for Pensions has said it will correct the calculator.

Business owners’ feedback also revealed general distrust of the entrepreneur pension system.

“Feedback received by the pension providers showed that many business owners are in a tight spot as costs rise and the economy falters. They also criticized the YEL income calculator. In general, the feedback said that YEL incomes are defined in a complicated way. By contrast, there was positive feedback about the quality of personal advice given by the pension providers,” Pelkonen said.

“Long-term solutions wide open”

In 2024, business owners with YEL incomes of €15,000–25,000 who have not made significant changes to their YEL incomes in the last three years will be under review. The pension providers estimate there are around 40,000 of them.

“What sometimes gets forgotten in the public conversation is that contributing to your pension at the right level provide security for a lot of eventualities. Sometimes voluntary pension insurance is proposed as a solution, which would suit to the nature of social insurance and how it’s funded really badly. The state is grappling to balance the public books, and in terms of funding entrepreneur pensions, the long-term solutions are wide open. The entrepreneur pension system should continue to be developed to match business owners’ actual labour input and to respond to changes in the work and the labour markets. Many business owners find it hard to understand the current concept of YEL income,” Pelkonen says.

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