Second pillar pension reform bill passes first reading

Martin Helme (foreground) at an earlier Riigikogu sitting.
Martin Helme (foreground) at an earlier Riigikogu sitting. Source: Priit Mürk/ERR

The bill to repeal mandatory membership of the so-called second pillar of the Estonian pension system passed its first reading at the Riigikogu on Monday, ETV current affairs show Aktuaalne kaamera reported Monday evening.

Finance minister Martin Helme (EKRE), speaking before the chamber, said that the reforms, which would make membership of the second pillar, employee contributions to pension funds, optional, could lead to up to €400 million more going into the state budget, after the suspension of mandatory payments, and one-off cash withdrawals of up to €1 billion resulting from increased income tax and VAT receipts.

At the same time, Helme said the reform will involve IT development at the Tax and Customs Board (MTA) and the social security department (Töötukassa), costing a little over €7 million, likely to be added to later running costs, which Helme currently estimates to be around € 1 million per year.

Helme also outlined the nature of the reform to the Riigikogu and the major changes being made to the current system. 

He also faced questions on clarification of the reforms and their impact.

The two opposition parties, Reform and the Social Democratic Party (SDE) put forward a motion to reject the bill at its first reading, though this was defeated by 53 votes to 40, ERR reports.

After the first reading was wrapped-up, a deadline of Dec. 16 was set for amendments.

Chairman of the Riigikogu's finance committee Aivar Kokk (Isamaa) noted that changes can be made to the bill at second reading.

The bill's main reforms are:

  • Individuals will have the right to decide whether or not to contribute to the second pillar, both those already in the pillar and those yet to joined.
  • The right to remain in the second pillar remains; those opting out will be able to contribute to pensions investment accounts.
  • Individuals have the right, under certain conditions, to mobilize their second pillar money when they retire.
  • It is up to individual discretion to decide how to use second pillar funds accumulated, on retirement.
  • Most of the changes introduced by the draft will be implemented in 2021. This will require the development of several IT systems supporting the operation of the second pillar, and other preparations through 2020.

The full text of the bill (in Estonian) is here.

Making the second pillar, mandatory for most wage earning Estonian citizens since 2010, optional, was a central plank of Isamaa's pre-election manifesto. Supporters say the existing system was too inflexible, with managed funds performing below the market average. Critics say that making the fund optional could lead to a short-term boost followed by a slowdown, as well as issues of shrinking pension pots among an aging society.

Both the Bank of Estonia and the IMF opposed the reform.

The original Aktuaalne kaamera report (in Estonian) is here.

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Editor: Andrew Whyte

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