Finance minister: Pension reform may be implemented step-by-step ({{contentCtrl.commentsTotal}})

Finance minister Martin Helme (EKRE)
Finance minister Martin Helme (EKRE) Source: Siim Lõvi/ERR

The coalition government is weighing-up arranging an investment account at a later date than the remainder of its pension reform is to be implemented.

The government is preparing a bill to make the so-called second pillar, which refers to employee contributions to pension funds, voluntary.

The policy, a central plank of the Isamaa party's pre-election manifesto, comes in spite of criticism from the Bank of Estonia and the International Monetary Fund (IMF).

Membership of the pillar had been mandatory for most wage-earning Estonian citizens since 2010.

The investment account is described by finance minister Martin Helme (EKRE) as the most innovative aspect to the bill, as well as the most complex. It is also dependent on the private sector.

Speaking at the regular government Thursday morning press conference, Helme said that the investment account scheme has been drawn up with the relevant banks and financial institutions which will provide it.

"We presume that financial institutions are interested in it and will make an effort on their own to ensure it becomes operational along with the reform as quickly as possible," Helme said, BNS reports.

"However, we have also taken into account the possibility that the investment account will be implemented later than the rest of the [second] pillar reform," he added.

"We may find a small time lag between payouts simply becoming available and payouts becoming available with an option to transfer money from the fund into an investment account. We hope this lag won't be very long," he continued.

Second pillar reforms going forward

The government approved Thursday a set of amendments aimed at making the second pillar voluntary. This followed a week-long period of consultation through the first week of November, when feedback was received from interested parties, including the tax authority, at least one major bank, and financial sector representative group Finance Estonia.

Those who wish to remain in the second pillar will not have to act in order to go on saving. To join or exit the fund, a corresponding application must be submitted to the Pensions Center or a bank.

Payments into the second pillar can be halted while the funds accumulated hitherto continue to be invested, it is reported, in addition to the option to take the entire lump sum out. Individuals will also have the option to channel funds into an investment account of their choice, the subject of the possible delays.

At the same time, individuals can decide whether to withdraw the funds either as a lifelong, or fixed term, pension payment plan, or to take out the full amount in one fell swoop.

The lump sum is capped at €10,000, with larger sums to be made in three installments within a year's period and incurring income tax.

If money is taken out of the second pillar after reaching retirement age, the income tax will be more favorable than usual, according to BNS, with no tax due under long-term pension plans, and 10 percent in other cases.

10 year bar on reentering second pillar remains despite concerns

One of the queries raised in the consultation period was the barrier to reentry to the second pillar within 10 years of leaving it. This stipulation remains in the bill, however. Those rejoining would have to wait another 10 years before they could withdraw money and/or re-exit the scheme, meaning that many would have to rely on the first pillar (state pension) or third pillar (existing private pension plans).

Other concerns raised by, for instance the IMF, included what sort of effect large-scale withdrawal might have on the economy in the long-term, following a short term surge, as well as shrinking pension pots in an aging population.

Should the bill pass at the Riigikogu, it would become law at the beginning of 2020, applications to leave (or join) the second pillar could be filed from summer, with most changes in full effect from the beginning of 2021 – also roughly the expected time when disbursements for those leaving the second pillar will start.

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Editor: Andrew Whyte

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