SY: YEL reform is not being based on real-time earnings – problems with the income calculator must be fixed

Under the draft Government Bill, 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. The earned income figure used would be taken from the most recently confirmed tax assessment. The problem with this model is that, when insuring on the basis of earned income, YEL income would be based on past earnings. “Freedom of choice is the right direction, but the earned-income model isn’t based on real-time income – it relies on old tax data. The reform must also fix the problems with the income calculator,” says Atte Rytkönen-Sandberg, a Vice President at Suomen Yrittäjät, the Finnish SME association.

The Ministry of Social Affairs and Health’s consultation stage on the draft Government Bill to reform the self-employed person’s pension system (YEL) closed on 5 Aug. Suomen Yrittäjät submitted its own opinion on 22 Jul.

Suomen Yrittäjät has welcomed the decision made at the government’s budgetary talks to extend freedom of choice as a sound statement of direction and principle.

“The draft Bill doesn’t, however, resolve the problems described in the reform’s stated objectives. Further preparatory work must find a model in which real-time register data can be used when insuring earned income, to the extent that such data are available,” Rytkönen-Sandberg says.

Under the draft bill, a business owner could apply to switch from an earned-income basis to an overall-assessment basis – the “YEL income model” – if the factors affecting their work input changed materially.

“If the basis for insuring earned income is the most recently confirmed tax assessment, it is essential that business owners can apply to have their YEL income revised if their earnings change materially. Any such revision must be based specifically on a change in income. The draft Bill must be corrected on this point as the legislative process advances,” Rytkönen-Sandberg says.

Pension providers must explain grounds for YEL income – arbitrary calculator must be scrapped

To develop the current YEL income model, the draft proposes that, before a business owner selects an income basis, the pension provider must give the business owner a statement of the overall YEL income assessment together with the reasoning behind it. The pension provider would also be required to give the business owner an opportunity to submit additional information with a bearing on the overall assessment.

“This is a step in the right direction. Business owners expect the reform to scrap the arbitrary income calculator. The law has to be clarified: when a pension provider confirms a YEL income figure, it must state clearly what the overall assessment is based on, and business owners must have a genuine opportunity to provide relevant data,” CEO Mikael Pentikäinen says.

Earlier this spring, at the budgetary talks, the government also set out plans to examine the prefunding of the YEL system and measures to reduce its administrative costs. The draft now at the consultation stage takes no position on either of these points.

“The measures agreed at the budgetary talks must be taken forward without delay. Before the next election, we need a broader review of the efficiency of the entire pension system and how it’s funded,” Pentikäinen says.

Suomen Yrittäjät proposals for the YEL reform:

• The reform must strengthen business owners’ trust in the YEL system.
• The goal must be to expand business owners’ freedom, make contributions more reasonable, bolster the credibility of the system, and make entrepreneurship more feasible.
• The criteria for determining YEL income and the pension provider’s obligation to give reasons must be clearly defined in legislation.
• The arbitrary income calculator used by pension providers must be scrapped, or its role in determining YEL income must be clearly redefined as an auxiliary tool only. Legislation must spell out how the value of work input is to be assessed in practice.
• Pension contributions must, as a starting point, be based on the value of the work a business owner actually does. The same principle applies to employees: pension entitlement accrues from work performed, not from ownership or investments.
• Suomen Yrittäjät considers increased freedom of choice the right direction. However, the proposals in the draft bill do not in practice give business owners sufficient control over their own level of protection.
• Further drafting of the bill must find a model that can use real-time register data when insuring earned income.
• The reform must consider the diversity of business owners and their companies as broadly as possible, and must not disadvantage different business forms or their owners relative to one another without specific justification.

The full text of the Suomen Yrittäjät statement is available here.

Further information: Atte Rytkönen-Sandberg, Vice President, tel. +358 40 359 1986, atte.rytkonen-sandberg@yrittajat.fi and Mikael Pentikäinen, CEO, tel. +358 40 504 1944, mikael.pentikainen@yrittajat.fi