Swedbank seeks pension pillars reform

Photo: Andres Haabu

Decent old age income would be ensured by monthly second pension pillar payments of up to tenth of salary.

Swedbank, asset manager with largest market share, thinks that third pension pillar is obsolete and people ought to make much bigger payments into second pillar – up to tenth of gross salary.

«The pension collection system has now been in use for ten years. We see how much people have gathered into the second pillar and how much extra they have gained, and we are convinced that the current system will not guarantee decent old age,» said Swedbank’s retail banking chief Ulla Ilisson.

All proposals by Swedbank bankers are based on the notion that to make it, in old age, people need to start collecting pension money earlier – and in much bigger amounts that Estonians are currently in the habit of doing.

«Today’s pensioners are not loaded with money; however, in the future, pensions ought to guarantee minimum 40 per cent of the last income. Yet, with many people, this might not be the case, and there has been no discussion of it in the society,» added Ms Ilisson.

Swedbank’s pension funds head Loit Linnupõld stated that Estonia lacks an agreement on the size of people’s pensions related to their final salary. «In Scandinavia, it is 70 per cent. This is what everybody is striving for, and for that, 20-22 per cent of the salary should be saved the whole life long,» said Mr Linnupõld.

Taken together, Swedbank’s proposals mean that, in the bankers’ opinion, people should invest much more into pensions than is currently practised: up to ten per cent of gross salary.

Right now, the practice is 2 per cent.

Three per cent would do

At the moment, the campaign is on for people to increase their payments from two per cent to three, in 2014–2017. According to Ms Ilisson, even after 2017, it ought to be possible for people to raise their payments above the two per cent. Ideally, this would be 10 per cent. However, to start with, it would be enough to go with three per cent of gross salary – permanently.

«With the current spending structures, looking at how much is spent on groceries, it is unrealistic to expect people to lay aside ten per cent. But this might be the goal,» said Ms Ilisson.

The third pillar should be merged with the second, as third pillar payments keep shrinking and, in the bank’s opinion, it is not prudent to maintain a small, shrinking and increasingly expensive system.

«To put it plainly: we should pull the third pillar down and broaden the second pillar,» explained Mr Linnupõld. «A bigger fun is more cost-effective, thereby guaranteeing a bigger pension.»

Mr Linnupõld added that the weakness of the third pillar is the «open back door» – at any time, money can be taken from there. The second pillar disbursements, however, being limited – only in case of death may relatives claim cash payments. According to bankers, third pillar contracts shrank substantially during the crisis, people pulling the money out.

Mr Linnupõld said that employers ought to be motivated to make pension payments – not only for the sake of tax incentives, but also because of competition for labour force. «The labour market suffers from shortage of qualified professionals, made worse by declining demographics. Nothings improves by itself, employers need to be attractive,» said Ms Ilisson.

Swedbank’s vision is derived from the Nordic system, where an employer will, for example, pay ten per cent of gross salary into pensions fund, if the person puts in five per cent.

«Right now, employers do not participate in the pensions system. Since last year, it is possible to invest in the third pillar; however, according to statistics, less than ten companies are doing that, when it comes to our funds. Companies are not interested, at all,» said Ms Ilisson.

Life-span funds strategy

In addition to large Scandinavian groups, Prison Service serves as an example of an employer investing into employees’ pensions – instead of special pensions, the state makes payments into the third pillar.

Also, the bank would like to do away with the current funds structure, with pension funds divided risk-wise, into bond and equity funds. Instead, we should have the so-called life-span funds, automatically regulating their risk levels according to how much time remains to retirement age – should 50 years remain, funds would risk more; with 10 years left to go, the risk-taking would decrease.

According to Mr Linnupõld, with life-span funds, people would not have to choose risk levels as they join; the fund would do that for them, being riskier and seeking higher yields in the initial phases, lowering the risks as retirement age approaches – to protect whatever is accumulated from money market fluctuations. «In Europe, over half of pension assets sit in life-span funds,» said Mr Linnupõld.

In Swedbank’s estimation, a third of pension gatherers have chosen wring funds – having a low risk fund in their younger days, and a conservative one when older.

Right now, pensions funds for young people, obligated to join second pillar but not having made their choice, pension funds are chosen by castings lots. According to Mr Linnupõld, to begin with, the casting of lots should be discarded – funds with the moist aggressive strategies opted for, to begin with.

Ministry of Finance said that as the bank’s proposals have not officially reached them, comments are not possible.