Flexibility planned for second pillar pension benefits

Photo: Seb.ee

Yesterday, finance minister Sven Sester introduced a plan to amend payments from pension system aimed at increased flexibility and transparency. 

The current system of state pension plus a mandatory funded second pillar and voluntary third pillar was created 13 years ago. The second pillar payments have been made since 2009 i.e. for seven years and during the initial payments from it the second pillar had been accumulated for quite a brief period of time.

For the time being, a relatively small part of the population is reaching into the second pillar benefits – less than a tenth of the overall amount of pensioners. At the end of 2014, a total of 25,154 people were entitled to second pillar benefits, of whom slightly over three fourths (19,324 people) had applied for payments. Meanwhile, there were 300,151 old age pensioners in Estonia. Every year, 3,000–4,000 pensioners are added such as joined the second pillar.

Not all are withdrawing the second pillar. For that, there are mainly two reasons. Firstly, lots of pensioners keep on working, but many actually want to bequeath the fund.

The latter is rather smart. As the second pillar funds are relatively young (maximum 13 years), the sums accumulated are quite meagre and are not too much help. By the end of 2014, the second pillar benefits averaged a little under €50 a month.

Meanwhile, for those who entered the contract in 2014 i.e. the new pensioners, the average payment was €56 a month.  

At the moment, there are three options to draw benefits from the second pillar. If the sum accumulated is rather small i.e. below €1,583.7 (to be precise, ten times the national pension rate currently at €158.37), the entire second pillar may be withdrawn at once. In 2014, a bit over a quarter did just that.

If the accumulated sum stands at €1,584 to €7,918., an agreement may be made with the pension fund manager to make payments by the fund. The other option is, with consent by insurance company, to enter a pension contract with the latter.

If above €7,918.5 has been accumulated, one must enter a pension contract with some insurance company. One-off benefits or funded pension are not possible. For such as have especially much money accumulated, over €110,859, the pension contract conditions are very flexible – a contract may be entered regarding the entire sum, or the above amount and the rest be withdrawn at once. And there are other options.

As suggested by finance ministry, the thresholds will remain the same (in that case, the thresholds are 10, 50 and 700 national pension rates). The new proposal is allowing pension contracts with investment risk. While currently it is money that goes to the insurance company, the plan says it may be some other financial assets – preferably pension fund shares or shares of investment funds which follow equivalent rules. Also, the finance ministry will propose allowing fixed-term pension contracts next to funded pension.