The aim of the Pension Act currently in Riigikogu proceedings is to render funded pension voluntary so that people would be free to make financial and investment decisions. It is also set to improve pension fund productivity for those who decide to continue saving in the second pension pillar because fund managers will have to make more of an effort compared to the current system.

Rendering funded pension voluntary has caused a lot of controversy and sparked various opinions. A law that affects 740,000 people is bound to create public debate and draw criticism.

Hardly a perfect bill

Is the bill currently in Riigikogu proceedings perfect? I believe not. It needs more work – shortcomings need to be removed from the text and proposals to amend considered. We have involved several renowned experts and interest groups. Nothing has been set in stone yet, contrary to what several opponents are trying to say.

The pension reform is important for allowing people to decide their finances and future for themselves. At the same time, it is at least as important to make sure pension funds continue investing in the Estonian economy and making money for their clients.

Funds' investments into the Estonian economy have gradually become more important over recent years and play a notable role in providing capital for our companies. Well-capitalized companies, in which pension funds play an important role, create more incentive for investments bringing value added.

The Riigikogu should definitely consider proposals to disperse funds' investment risks should several dozen percent of their members decide to pull out after the reform.

To have pension funds capable of stronger returns, it is worth considering increasing their credit limit. Hiking the limit from 10 percent to 30 percent of net assets would improve pension funds' management leeway and increase operational flexibility in the conditions of altered contributions. It would also be in line with developments at the world's leading pension funds.

Hiking pension funds' credit limit would help funds manage liquidity. In connection with planned major changes and the possibility of short-notice withdrawals, Estonian pension funds could feel the need to borrow more to manage liquidity. Pension funds could set up short-notice credit at local commercial banks.

In a situation where pension funds can borrow on sensible terms, borrowing could be more useful for unit holders both in the longer and shorter term. It could be a far bigger problem if fund assets are put up for fire sale for less than their net value.

Pension fund investments

As an alternative to increasing credit limits, it pays to consider whether leaving the fund or opting for a different one should be allowed three times a year with one month of advance notice or less often.

Proposals have been made to obligate people to give at least six months' advance notice. This would allow funds to avoid fire sales of assets.

If people could only be allowed to leave the pension fund once a year, with the advance notice period lengthened to six months, it would reduce the likelihood of the money being used to make emotional everyday purchases. It would also allow funds to comfortably ensure liquidity.

We need to ensure the protection of pension assets of all pension fund clients when implementing the law.

Another proposal worth considering would allow pension fund units to be used as collateral for a loan. This would see funds withdrawn from pension funds more slowly and in smaller volume. It would not disrupt economic balance but increase choice and flexibility instead that is one of the goals of the reform.

The rates of return for pension funds are forecast to grow to 5-8 percent a year in the new competition situation. Interest rates of loans would definitely be lower. This means that people would benefit from borrowing based on pension fund units instead of cashing the latter and exiting the pension system that would manufacture uncertainty for the future.

In order to boost economic growth, the Estonian economy needs pension fund investments in the coming years. Many such projects are already in the initial phase. Pension fund investments are needed first and foremost by companies based on Estonian capital for boosting productivity and modernization.

We have reached a phase where different sectors of the economy need to realize major investments inside the next decade. Otherwise, the competitive ability of our entrepreneurs will start falling quickly.

I hope Pension Act deliberations will be constructive and result in a pension system reform that will open the market to competition and give funds freer hands for boosting returns.

The reform will also deliver an impulse for livening up the Estonian economy and give people the right to decide how they believe it's best to save for pension. At the same time, the state will have to contribute more to promoting saving and financial literacy. This would help manage risks associated with short-term, emotional financial decisions.

Isamaa wants our people to be able to decide the fate of their money and their future themselves and for pension funds to continue investing in the Estonian economy and thus generate their clients additional annual revenue.

It needs to be emphasized that everyone will retain the possibility not to make changes to their pension, with the chance to join the current system given to people who have not joined funded pension today. In addition, there will be a lot of alternatives for saving up for retirement.

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