Article 23.11.2022

Most frequently asked questions on the YEL reform

What questions are self-employed persons asking about the Self-Employed Persons’ Pensions Act (YEL) reform? We assembled all of the questions most frequently asked by self-employed persons. The expert for the article is Ilmarinen’s Director, Insurance Services, Minna Hakkarainen.

• What will change in the Self-Employed Persons’ Pensions Act and why?
• At what stage is the reform process and will it be implemented?
• Will it be worth continuing with entrepreneurial activities after the YEL reform?
• How will YEL income be determined in the future?
• How does the pension insurance company adjust the YEL income?
• How will the discretionary nature of YEL income be dealt with?
• How does the YEL reform impact the YEL contribution?
• Why are YEL contributions not funded?
• How can a self-employed person prepare for the changes?

What will change in the Self-Employed Persons’ Pensions Act and why?

The goal of the reform is to improve entrepreneurs’ security and harmonise how YEL income is determined in different pension insurance companies. The reform focuses on determining and adjusting YEL income, because it has become common for self-employed persons’ YEL income not to correspond to the true value of their work input. Research shows that the YEL income of many entrepreneurs has been lower than what the current act provides, which means that the entrepreneur has a low level of social and pension security, below that of other population groups.

The legislative proposal does not change the concept of YEL income, but it does provide more detail on the information used to determine it. YEL income still corresponds to the wages that would be paid to another person performing the self-employed person’s work. YEL income will be made proportional to the median pay level of employees in the entrepreneur’s sector. When determining the YEL income, also other information describing the value of the work input is taken into account. Plenty of room remains for individual discretion and variation, and the act also requires it.

A pension company’s YEL income decision is important to a self-employed person because it impacts their income and YEL contributions. When making a decision requires discretion, the justifications for the decision become all the more important. The legislative amendment requires better justifications for YEL income decisions in order to increase transparency.

The biggest change in the proposal concerns pension companies’ new obligation to adjust YEL income regularly, every third year. This is to ensure that the YEL income is up to date.

At what stage is the reform process and will it be implemented?

Parliament approved the proposal by the government to amend the Self-Employed Persons’ Pensions Act in a vote on 9th December 2022.

The reform will enter into force on 1 January 2023. The contents of the act are being defined in more detail by the Parliament compared to what the government proposed last summer.

Will it be worth continuing with entrepreneurial activities after the YEL reform?

The legislative amendment being dealt with will not dramatically change the pension system for the self-employed. It will provide more detail on the concept of YEL income and its adjustment. The changes will lead to a gradual increase in the YEL income and YEL contribution for some entrepreneurs, however not quickly or for everyone. A self-employed person’s opinion will still be heard in the confirmation of YEL income in the future, as much of the information affecting YEL income comes from the self-employed person. The entrepreneur will still be able to impact the level of their YEL income with extensive leeway.

Self-employed persons are concerned that the YEL contribution will rise unreasonably. It is likely that the amendment will raise some entrepreneurs’ YEL contributions because many entrepreneurs’ YEL income is close to the minimum YEL income. Some of this low-level YEL income is supposed to be low. The YEL income of self-employed persons whose YEL income is clearly lower than the level required by current legislation will rise. If the YEL income is sufficiently close to the value of the work input, the legislative amendment will not change the YEL income. In the drafting of the law, the assessment was that the changes may impact the profitability of companies and the income of entrepreneurial households, but only moderately.  

Many sole proprietors have commented that they wish to somehow tie the YEL contribution to their income, which would better account for their activities’ profitability. YEL insurance could be income-based as it is in many EU countries. No consensus was found on the use of income, which is why the drafting of the law was not taken in this direction. Those opposing the income-based model have been concerned about its impacts on the selection of the company form and income and tax planning.

How will YEL income be determined in the future?

When a self-employed person takes out YEL insurance or applies for a change to their YEL income, estimating and confirming the YEL income usually takes place in Ilmarinen’s service as follows:

• The self-employed person logs in to the online service where they receive help in estimating their YEL income. They report their sector and estimated net sales using an application. Based on this preliminary information, we will calculate a YEL income recommendation for the new entrepreneur and its leeway (+/-30%) using the pension insurance sector’s shared calculator. The YEL income recommendation is already included on YEL applications and will be added to YEL income amendment applications.
• Next, the self-employed person estimates their YEL income themselves by considering what a reasonable annual salary would be for a similarly qualified person performing their entrepreneurial activities. It is not necessary in an assessment to consider the self-employed person’s earned income and capital income or the company’s profit or loss.
• The self-employed person compares their YEL income estimate to Ilmarinen’s recommendation and decides what YEL income they will apply for. The recommendation serves many self-employed persons due to the extensive leeway, but not everyone because of the great variety in entrepreneurial activities. If the applied for YEL income differs from the leeway offered by the recommendation, we will ask the self-employed person for more information.
• Finally, we confirm the entrepreneur’s YEL income. The speed of processing depends on whether the required information is available and how much deliberation is required to confirm the decision. The pension insurance company is still the party that confirms the YEL income. Self-employed persons can apply for a change to their confirmed YEL income, just like before.

How does the pension insurance company adjust the YEL income?

Also in the future, the pension company will increase the YEL income with the wage coefficient at the start of the year (next increase +3.8%), so that YEL incomes do not fall behind the general pay development. In addition, the legislative amendment means a new obligation for pension companies to review YEL incomes every three years. The reviews apply to self-employed persons with valid YEL insurance on 1 January 2023.

The reviews will start from 2023 YEL incomes that are below 15,000 €/year and that have not been adjusted significantly for three years. In 2024, YEL income below 25,000 €/year will be reviewed and in 2025 YEL incomes above this amount. If the YEL income appears to be too low, the self-employed person will receive a YEL income recommendation from the pension insurance company, after which they can estimate their YEL income level as described above.

The adjustment restrictions are to be applied to the first two adjustments carried out after the act enters into force. These adjustments cannot be more than EUR 4,000 at a time. Thus amended, a self-employed person’s YEL income can be adjusted upward by a maximum of EUR 8,000 over the course of two adjustments. The YEL income may also remain unchanged or fall.

How will the discretionary nature of YEL income be dealt with?

Making a YEL income decision requires weighing various aspects and carrying out an overall assessment that highlights the significance of available information. If the applied for YEL income differs from the leeway offered by the YEL income recommendation, we will ask the self-employed person for more information to assist in our deliberation. It is possible to deviate from the leeway for justified reasons, in which case all the information impacting the YEL income should be supplied to the pension company. This information includes the extent of the entrepreneurial activities, the number of working hours and operating months, competence, and the value of the work input.

Pension companies apply the Self-Employed Persons’ Pensions Act (YEL) and the Finnish Centre for Pensions’ YEL application instructions, which describe the situations in which it is possible to deviate from the YEL income recommendations. There can be many reasons, including the secondary or part-time nature of the self-employed person’s activities and a low or higher number of working hours.  

How does the YEL reform impact the YEL contribution?

Concerns have been expressed in the public debate on whether the YEL income and YEL contribution will be determined purely based on the median pay of the employees in the entrepreneur’s sector after the legislative amendment. Not to worry, this will not happen. First of all, the YEL income will not be determined without hearing the self-employed person. The legislative amendment does require the use of the sector’s payroll data, but also other information.  

Next year’s YEL contribution is 24.1% of the YEL income (25.6% for those aged 53–62 years). A new entrepreneur will receive a 22% discount on the contribution for four years. The YEL contribution with minimum YEL income is some 2,070 €/year and 1,610 €/year with the new entrepreneur’s discount. The insurance contribution interest rate 2.45% has a slight impact on the amount of contribution when the annual contribution is divided up into instalments and due dates.

The minimum YEL income can rise based on a pension company’s initiative so that it increases the contribution by some 85 €/month during a single adjustment. The contributions are tax-deductible.

Why are YEL contributions not funded?

Self-employed persons’ pension benefits have accrued since the establishment of the YEL system under the same rules as for employees. The only difference is that the pension accrues from YEL income instead of salary or wages. When the Self-Employed Persons’ Pensions Act (YEL) entered into force, funding was not begun due to self-employed persons’ age distribution. People, on average, become entrepreneurs at a later age than they become employees, which would lead to a higher pension contribution for older people. The YEL contribution level was tied to the average TyEL contribution. A stipulation on making YEL contributions equitable was included in the act, according to which the state funds the part of the pensions that the YEL contributions do not cover. Lawmakers were aware that the stipulation would be needed, as has happened almost every year since 1979.

If it is presumed that pension benefits will not be changed, transferring to a funding-based YEL system would raise YEL contributions. Transferring to funding would therefore require added financing and initial investments for which there have so far not been any willing financers. There are options for transferring to funding, if the required support and will to promote it could be found. Transferring to funding was not studied in connection with the preparation of the current legislative proposal.

How can a self-employed person prepare for the changes?

As a self-employed person, you can prepare for the upcoming changes by keeping your YEL income up to date. Self-employed persons can check their current YEL income in our online service, where they can also fill in a change application for YEL income. Make changes well ahead of time because it is not possible to change the YEL income retroactively.

It is worth assessing the correct level of YEL income at least once a year and always when your entrepreneurial activities experience long-term changes of at least three months. Your YEL income will be adjusted typically when your entrepreneurial activity expands or decreases, or your part-time entrepreneurial activities turn into full-time self-employment or vice versa. We recommend that new self-employed persons adjust their YEL income when their entrepreneurial activities become established, for example six months after taking out YEL insurance.

When the self-employed person keeps their YEL income up to date and within our YEL income recommendation’s leeway, we will probably not propose a change to the YEL income in upcoming years in the YEL income reviews carried out at Ilmarinen’s initiative.

Especially now that income risks are high, it is a good idea to keep the YEL income up to date. For example, as a result of Covid-19, many entrepreneurs have needed social security, the amount of which is affected by YEL income.