Estonian FinMin puts pension reform bill on approvals round

Pension. Photo: Wong Sze Fei / Panthermedia / Scanpix

A set of legislative amendments aimed at making voluntary the system of mandatory contributions by working-age people into a pension fund, dubbed as second pillar of the pension system, on Wednesday exited the Ministry of Finance for an interministerial round of approvals.

Almost 740,000 people in Estonia have joined the second pension pillar at this point. 

"When the amendments have taken effect, the second pillar will not be mandatory anymore — it will be just one possibility for accumulating money for retirement. In the future everybody will be able to decide for themselves whether they want to save and invest themselves or continue to leave this task to the pension funds. The main thing is to carefully consider one's choice in order for the person not to be hit by an unpleasant surprise upon retirement in the form of smaller than expected income," Finance Minister Martin Helme said in a press release. 

The minister said that making the second pillar voluntary will also have an effect on competition between funds and will hopefully bring funds with better conditions to the market. 

Helme also emphasized that nothing will change for the people who have joined the second pillar and wish to go on accumulating money into a pension fund, as no application is required from them. 

When the reform takes effect, joining and leaving the second pillar pension fund will become voluntary. To join or exit the fund, a corresponding application must be submitted to the Pension Center or a bank. Payments into the second pillar can be stopped, while funds accumulated in the fund will continue to be invested. Payments into the fund can also be stopped along with the whole sum being withdrawn and the amount equaling 6 percent of the person's pay that currently is paid into a pension fund channeled into a pension investment account.

Persons who have money in their second pension pillars will be able to decide upon reaching retirement age whether they withdraw the money as a lifelong or fixed-term pension or the full amount at once. If money is taken out of the second pillar after reaching retirement age, the income tax will be more favorable than usual. Money withdrawn under a long-term pension plan will not be taxed at all, while in other cases the tax rate will be 10 percent.

For people who have exited the second pillar the possibility to rejoin it would open in ten years. For the people who rejoin the system the possibility to withdraw their money and exit the pillar again would reopen after they have accumulated money into a pension fund for ten years. Such people would get their pension after retirement only from the first pillar or from the third pillar if that exists.    

Withdrawal of the money accumulated by people into a pension fund will be possible as a lump sum for amounts of up to €10,000. The payout of bigger sums will be made in three portions. Payouts are subject to income tax. The payouts will be made in three portions within one year, in January, May and September, or in the same months when exchanges of pension fund shares take place.

As of September 2019, approximately 740,000 people had joined the second pension pillar. The amendments would enable 100,000 people who are of working age but have not joined the second pillar to join it. 

The total volume of pension funds as of September 2019 was €4.5 billion. The average amount accumulated per person is slightly over €6,000 and the median amount about €4,500. The planned period of saving for people starting their working life is 40 years. The system of funded pensions has been in effect in Estonia for 17 years and mostly savings have been accumulated during a shorter period of time than that.

Under current plans, most of the changes would take effect from January 2021, whereas applications for joining the second pillar or leaving it could be filed from the summer of 2020.