While we Estonians are very critical towards our second and third pillar pension funds, PensionsEurope CEO Matti Leppälä says the Estonian system is excellent and that Estonia has done better at explaining such funds to people than most countries in Europe.
Why don’t we start with the fresh news. What about the European Central Bank bond buying i.e. money printing programme proclaimed last Friday? For those saving money, is this good news or bad news?
We, the PensionsEurope pension funds association, are representing a pension funds federation of 23 countries with total assets worth €3.5tn. of that, a large part has been invested in European markets – in interest products, government bonds, listed shares, private asset firms. Naturally, the European Central Bank decisions have their effect on pension funds, probably positive. But I think it is too early to assess the impact.
Even so, the healthier the European economy, the better for the pension funds.
Are the investments of European countries’ pension funds rather the conservative kind, or do they hold a large percentage of shares?
We can’t generalise like that. We need to look at the type of pension funds, and there are the differences country-wise. The countries that have earlier invested heavily into shares of listed companies, like Great Britain, have cut such investments. In Holland, the proportion of shares is rather high. There are many countries that have invested less in the risky securities – in their portfolios, there are mostly government and corporate bonds.
The contents of portfolios are shaped by factors that vary greatly. Also, the environments are very different. In some countries, like Holland, the funds are very large – the largest is over €300bn in volume. But there are also the very small ones. All in all, there are over 140,000 pension funds in Europe, and a large part of these are very small.
Due to consolidation, the pension funds are getting bigger, even the big ones in Holland. That, in turn, changes the investment strategies of the funds – how complex investments they are able to make.
The European population is ageing. His sustainable are the European pension funds?
By definition, a pension ought to secure the people a decent pension. I’d say the systems are not sustainable, because in most of the countries the pensions of the larger part of the people are dependent on national social systems which are called the first pillar. As a rule, these are not independently financed and, during the decades to come, the demographic situation will sharply change – meaning: the systems are not sustainable. This means: in the future, people will have to work longer.
Generally speaking, the first pillar will not offer pensioners adequate income. At the same time, the countries do greatly vary.
The overall picture is that, to most people, the European pension system does not offer adequate income – to some, it offers excellent pension, but not to all. We need more varied forms of pension savings.
I think it is the greatest political challenge, now and in the years to come, to save a sufficient sum for pensions.
How well acquainted are you with the Estonian pensions system?
The Estonian fund managers union joined us from the beginning of 2015. I myself have followed the developments here since the beginning of 1990ies – the first time I came here to talk about pensions was in 1995.
I could not claim to know everything about the pension system here. I do know it is very different. Among the 23 member states of PensionsEurope, yours is very unique and very different than the ones in Germany and Holland, for instance, or other such traditional pension systems.
Is the Estonian pension system good?
I think it is very good. It is much better than many other schemes. I think the Estonian pension funds which have passed thru a very deep economic and financial crisis – which, in my opinion, is far from over –, have behaved much better than those in many other countries.
This is related to Estonia’s economy being in a much better condition than many economies in Central and Eastern Europe, and here the dangers have not realised.
Hungary, for instance, nationalised the pension funds; in Poland, the government took over the pension funds’ assets. In this regard, Estonia is an exception, Estonia has restored and compensated the pension payments.
In Estonia, the contributions are indeed small, but the system where the second pillar payments are mandatory is very good. Estonia is in a much better shape than any Eastern and Central European country.
But our voluntary pension pillar is as good as dead.
That’s so in many countries. This is an area that European Commission and other European institutions are actively dealing with. The European Commission has made several proposals and, at the moment, these are being reviewed.
The commission is of the opinion that, due to changes in the demographic situation i.e. the ageing of the population, we need more pensions in the second and third pillar. Increasingly, attention is being paid to the third pillar. This is complicated, of course, being also linked to taxation problems.
We are very critical towards our pension funds as their fees are too high and the yields low. The same as also been claimed by OECD.
It is difficult to compare the funds in various countries, as the structure of the fees and profitability are also linked to the national situation, such as size of the market. Investment and fund management environments are different in smaller and larger market situations.
In the international comparison, it must be considered that several aspects are incomparable. The level of the fees is very important, this is the main thing. This has a large impact on the final outcome. I know that in Estonia, the level of the fees has come down.
When it comes to yields, it cannot be claimed that in some country the yields are better – because we are looking at the nominal yield, but the situations in the nations may greatly vary. I understand that the yields of Estonian pension funds are very good, considering the risk level they accept. They are no worse than in other countries.
How is it with other European nations – are they satisfied with their pension funds?
It depends on the country, but the financial crisis has made people a lot more critical towards pension funds. This will not concern Estonia, but in the older countries with big traditions, people were promised certain niceties and benefits. Like in Holland, the pension system of which is the best in Europe and among the best in the world. But now, for the first time ever in their history, the Dutch are cutting pension payments.
I don’t think the pension funds are to blame here. This was the deepest crisis since the 1930ies and it would have been strange indeed if people had not seen it have an impact on the pension funds.
The other thing we are discussing is where to invest. Some think pension funds ought to invest in the domestic economy. On the other hand, our market is small, the stock exchange almost nonexistent, wherefore it is somewhat complicated for the pension funds to invest in the local economy.
The same kinds of discussions are going on in the majority of nations, if not all. European pension funds are investing more in Europe and in their own countries. On the European level there are several initiatives underway, and more to come, aimed at having pension funds invest more into Europe.
This is good if the investments are prudent, but pension funds must not be forced to invest for political reasons. First and foremost, the pension funds answer to the savers. They need to seek the best possible yield and the best pensions for future pensioners.
How to choose pension funds? Some say one must choose according to the yield. Others, however, say the yields point to the past and cannot be relied on as to the future. Some say we must choose according to the fund manager. Some say look at the fees.
All these aspects are important. What is most important is that the people are allowed to compare the various pension funds in the best way. The information must be plain to understand; if needed, advice must be provided.
As you said, pension funds should not be chosen according to one criterion. If a fund has a good yield but bad managers, the yield will probably not be good in the future.
Estonia is among the few countries with an internet platform where the various pension funds can be compared.
Let me repeat: Estonia has dome more than most countries in Europe to tackle this problem. Of course, this not something that can be accomplished at one sweep; it must be continually improved.