Isamaa leader rejects pension reform potential constitutional challenge

Isamaa chairman Helir-Valdor Seeder.
Isamaa chairman Helir-Valdor Seeder. Source: Siim Lõvi/ERR

Isamaa leader Helir-Valdor Seeder rejects claims that the coalition government's pension reforms conflict with the Estonian constitution. Seeder was responding Finance Estonia, a body representing the financial sector, who made the claims on Friday.

Finance Estonia had commissioned two lawyers to analyse the proposed reforms, who concluded that the bill could potentially violate the constitution.

The reforms mainly involve making the so-called second pillar of the Estonian pension system, which cover employee contributions, voluntary. Membership of the second pillar had been mandatory for most wage-earning Estonian citizens since 2010.

The policy was very much the baby of the Isamaa party and appeared in its pre-election manifesto ahead of the March 3 general election.

Seeder claims the analysis, conducted by Allar Jõks of Sorainen, and Toomas Vaher of Ellex Raidla, is not objective and reflects the interests of those who ordered it.

"This analysis very much reflects its customers' desires. If a financial institution orders and pays for something for itself, it gets what it orders," Seeder said.

At the same time, Seeder noted that legal issues surrounding the bill to make the reforms reality are likely to be debated at the Riigikogu.

"Naturally, there are also complicated legal issues which need to be discussed and possible risks considered going along with the process; if any are detected, they need to be reworded to make everying legally sound and in the best interests of pension recipients," Seeder said.

Seeder added that he saw now conflict with the constitution.

"On the contrary, this reform enhances human freedoms and rights, though not at the expense of other people's freedoms and rights, and gives everyone greater opportunities and freedoms and greater responsibility. In a broader sense, exaggeration and widespread criticism has come from those whose narrow economic interests are currently being curtailed by this reform package, but they are actually a small fraction of financial institutions, not future retirees," Seeder said.

Seeder's response to lawyers' specific concerns

Seeder hopes the bill will reach its first reading this year and will be passed by law in January or February.

Toomas Vaher said that changnig the pension system will lead to unequal treatment between people within the pillar and those who were not in it, with those in it some getting 4 percent of their social tax added to the second pillar, which they would then be able to withdraw, while others could not.

However, Seeder says that this was already the case.

"While these things have to be discussed and thought through, in a broad sense the subject has been very artificially invented ... these people who are not affiliated to the second pillar and who do not have the opportunity to withdraw money accrued to it, will have a higher state pension in the future," Seeder claimed.

Financial situation of those remaining in second pillar may deteriorate

Allar Jõks said that those who wish to remain in the second pillar may find themselves in a worse situation if large numbers of people take the option to leave, meaning the forced sale of illiquid investments to cover the costs. Vaher concurred with this view.

However, Seeder said that funds in any case must have sufficient, provable liquidity, something monitored and confirmed by the Financial Supervisory Authority, meaning that large-scale.

Seeder replied that the funds must have sufficient liquidity and the ability to provide it to clients. "People still have that freedom today, and every fund must be ready for it individually. So for a particular fund, this is not "There are opportunities for people to relocate their money and this will not cause any major crashes for the funds or for the Estonian economy," Seeder said.

Withdrawal limits may lead to inequalities

Another sticking point, Vaher said, was limiting the initial withdrawal to €10,100, which could violate the fundamental right to equality since individuals exiting the pillar could lead to a change in value of the financial instruments within the pillar and thus a change in real value of later withdrawals.

"As the exit from the second pillar may result in a change in the value of the instruments in the pillar, any infringement of the fundamental right to equality should certainly be taken into account," Vaher said.

Jõks concurred: "Under the bill's proposed limit, those with more than €10,100 in assets will not receive their money in one go, but in three instalments a year. This, however, amplifies the risk that the assets of those who have raised more money will be significantly impaired before they can get their money.

Seeder agreed that this issue needs consideration, and may even lead to amendments to the bill.

"If it is found that [the current withdrawal limit] violates and restricts people's rights and should allow everyone to take everything out immediately, then I think we are certainly ready to make that change," Seeder asserted.

"However, I do not think that this any way represents a violation of the fundamental rights of the people, nor is it in conflict with the principles of the constitution," he asserted.

Second pillar productivity harmed by mass withdrawals

Finally, Alar Jõks said that pension fund productivity might fall to a critical level, depending on how many people quit the system, meaning that the second and first pillar (the state pension) together fail to guarantee the constitutional social rights of the second. Jõks also noted that the draft explanatory memorandum to the pension reform bill failed to address such guarantee.

Seeder rejected this, saying the opposite was the case and that the reform would give people greater freedoms in line with their own capabilities and needs, as well as the private sector having to respond more to customer needs,

"The purpose of pension reform is to enable people to invest more money, with greater freedom to invest differently, according to their capabilities and needs. This gives people the opportunity to spend more money and invest, and thus the opportunity to earn a bigger pensions in the future. The same goes for financial institutions, whose opportunities are growing and expanding. At the same time, real market competition will be created, whereby pension funds and insurance companies will have to make efforts in the future, to keep customers engaged and to make offers that are customer friendly and that will definitely increase their return. And certainly during the payout period, where that money is going to grow and produce in the future, not as is the case now, where it isn't growing at all. So the reality is quite the opposite," Seeder said.

The Sorainen analysis also claimed that the length of time between the reforms coming into law, at the beginning of 2020, and individuals leaving the second pillar being able to make disbursements, about a year later, is not a reasonable adaptation period.

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Editor: Andrew Whyte

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