Fund managers call for changes to Estonian pension system

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Collection of money into pension funds should be increased in the Estonian pension system in order to ensure sufficient income for future pensioners, and steps by the government to change the present system are necessary, fund managers speaking at a roundtable on Wednesday said.

A well functioning pension system is in the interest of the entire society, as having a large number of poor pensioners could pose quite a big risk to society, Indrek Holst, CEO of SEB Elu- ja Pensionikindlustus (SEB Life and Pension Insurance), said at the roundtable at BNS sponsored by the Estonian banking Association and BNS.

"If we look at society more broadly, at what is going on elsewhere in the world and how one is fighting for one's rights, then to my mind a poor pensioner is a rather big danger to the society," Holst said. "First, he can be manipulated. We don't have to look far for examples of how much the vote of a pensioner costs when allowances are handed out."

"In my opinion it's a very big threat and basis for the emergence of populism of whatever color," Holst said. "A poor society is open to such things, and a poor pensioner is more open to such things. He or she is definitely more active in elections."

When the number of poor pensioners is big and their numbers keep growing, 'a single spark of populism could be enough to turn the economy on its head'," Holst said.

In the Estonian economy the discussion is absent of how much would society be prepared to pay so that the overall level of social security of retiring people would reach the normal European level, that is, 65-70 percent of the last salary.

According to calculations by SEB, about 30 billion euros in today's money should be accumulated into second and third pillar pension funds by 2030 to achieve that level. That's compared with 12 billion euros that pension funds are estimated to contain by then. Right now funds of the second pillar have assets of 1.5 billion euros and funds of the third pillar 0.2 billion euros altogether.

The CEO of Danske Capital, Silja Saar, said that when second pillar funds started off in 2002 the year 2030 – when the savings are due to be tapped into more extensively – seemed relatively far. "But the exodus of population after the crisis has brought us much closer to that real situation," Saar said.

The 18 billion euros that will be missing by then is each individual's problem and a problem of all of us at the same time, said Saar. "It's not [Prime Minister Andrus] Ansip's problem, it is a problem of us as society," Saar said. "Nobody of us wants to live in a society where there are poor pensioners."

The CEO of Nordea Pensions Estonia AS, Angelika Tagel, said it should be in the state's interest to provide retiring people with a pension that is higher than the level of 40 percent of the last salary set out by the European Social Charter. The pension system should be viewed as a whole consisting of three pillars, she said.

In Finland, the percentage of a person's salary going into the second pillar has been 22 percent for years, compared with the Estonian ratio of 6 percent, Tagel said. "It's predominantly employer's pension. Therefore they don't have a widespread third pillar, because very much of it is already in the second pillar or employer's pension," said Tagel.

Tagel said one way of improving the Estonian system would be to leave the ratio going into the second pillar permanently at the current temporary rate of 9 percent of the salary. "Six percent is clearly not enough," she said.

Even though the possibility to accumulate money into the third pillar or voluntary pension fund has existed since 1998, one-third longer than the second pillar, very little money has been collected there. "During that time people themselves have saved relatively little of their own free will," said Tagel.

At present the financial groups Swedbank, SEB, Nordea, Danske and LHV, as well as the insurer Ergo, offer second pillar or mandatory pension funds in Estonia.

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