LHV Group said on Monday that while Pensionifond Eesti, run by its asset management arm LHV Varahaldus, has been investing pension assets primarily with a long-term outlook and in the local economy, making the second pension pillar optional does not support that strategy. 

LHV said fundamental changes to the principles of mandatory pension accumulation will directly affect the capability of funds to continue developing the Estonian capital market.

AS LHV Varahaldus CEO Vahur Vallistu said: "Managing a fund investing in Estonia alone was an ambitious undertaking, as considering the small size of our capital market the fund manager itself had to help in the creation of new instruments. It must be held that making the second pillar optional will put the brakes both on investments made by pension funds in Estonia and, through it, expansion of the financing options for Estonian companies. Under these conditions it is not possible to continue managing a fund which invests exclusively in Estonia."

He described the current developments taking place under the name of pension reform as forcing pension funds to take the easier path and invest in international securities.

A few years ago, the state eased investment restrictions for pension funds. As a result, the investments made in Estonia almost doubled. To date altogether €590 million has been placed in the Estonian economy, accounting for 13 percent of the total assets of pension funds. In September this year the management fees of pension funds were lowered to the average level for member states of the Organization for Economic Cooperation and Development (OECD), Vallistu said.

"Both changes had a positive effect for the client, supporting an increase in pension assets. However, making the second pillar optional is a step in the opposite direction. It is extremely regrettable that the reform is carried out in a hurry and at a time when all the desired developments when it comes to developing of capital markets, increasing investments by pension funds in Estonia and reduction of fees have materialized," Vallistu added.

LHV Pensionifond Eesti will be merged with LHV Pensionifond L, whose assets Estonian investments make up nearly one-third. The merger requires clearance from the Financial Supervision Authority.

No actions by unit holders of the fund are necessary for the merger to take place. As a result of the consolidation, LHV Pensionifond Eesti will discontinue its business and its assets and liabilities will transfer to LHV Pensionifond L without a liquidation process. 

Pension funds of AS LHV Varahaldus have over 176,000 customers. LHV offers both actively and passively managed second and third pillar pension funds, the volume of which in total is over €1.3 billion.

Plans put forward by Isamaa earlier this year will see the currently mandatory second pillar pension fund become voluntary, if the changes are agreed by the Riigikogu.

The second pillar comprises mandatory contributions to pension pots from employees, as against employers (first pillar) or private pension schemes (third pillar).

Mandatory from 2010, those born in or after 1983 must pay into the second pillar; those born between 1942 and 1982 had the choice to opt out when the scheme was first introduced.

Abolition has was a central plank of Isamaa's pre-election manifesto. A common argument in favor of removing the second pillar is that funds underperform in comparison with the economy. Opponents to abolition say it would hit lower-income earners the hardest.

The International Monetary Fund says that removing, or even reforming, the second pillar would, given Estonia's ageing population, increase the burden on future generations further, as people potentially raid their pensions savings early. The Bank of Estonia has also recommended the new changes not be implemented.

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