Pension reform largely not counter to constitution, says law firm

Paul Keres.
Paul Keres. Source: Siim Lõvi /ERR

Pension reforms initiated by the Estonian coalition government are predominantly in line with the Estonian Constitution, a Tallinn law firm has found.

Legal analysis of the constitutionality of the planned reforms, which passed their first reading at the Riigikogu on Monday, was commissioned by the justice ministry and carried out by Tallinn law firm Glikman Alvin Levin, and found that the reforms generally do not conflict with the constitution, BNS reports.

The aspect of the reforms which allow individuals to leave the so-called second pillar of the pension system, which concerns employee contributions to pension pots, including 4 percent of an employee's social tax paid into the pillar by the state, were particularly in focus in the analysis, as these aspects had attracted most claims that they may be unconstitutional.

Making second pillar optional most in focus

The analysis' conclusions concern, among other things, the provision which entitles people who have joined the second pillar of the pension system, meaning mandatory accumulation of money into a pension fund, to withdraw in cash when exiting the second pillar also the 4 percent portion of social tax paid into their second pillar by the state. 

This did indeed raise the most questions of unconstitutionality, but the concerns were found not to be major.

"A contradiction is seen in this with the fundamental right to equality, as pension savers in the first [state pension] pillar cannot withdraw their social tax before retirement," Glikman Alvin Levin found, according to BNS.

"No violation of the fundamental right to equality arising from the constitution occurs here, as the treatment of first- and second-pillar pension savers already differs sufficiently in the existing system to the extent that in our estimate we are not talking about comparable groups," the report continues.

An alleged contradiction with the constitution came in the provision which enables persons to demand the redemption of all pension fund units, but not a part thereof. However, Glikman Alvin Levin finds that the reform will expand possibilities for the exercise of command over individual pension fund units, which are very limited at present.

Though these are not expanded in such way where a person can demand partial redemption of fund units in addition to the redemption of all units, this does not impose a restriction on the fundamental right to ownership impinging on the constitution, the report continues.

Glikman Alvin Levin also pointed out that the authors of the bill have taken into consideration that if people exit the second pillar in large numbers, this may have a negative effect on the value of the fund units for those who remain.

While this constitutes an infringement on the fundamental right to ownership, it is nevertheless proportionate, Glikman Alvin Levin says.

"This infringement is not very intensive, as it will open the value of the units of those saving in a pension fund to one additional investment risk only, which the bill also tries to mitigate by means of restrictions on the withdrawal of money."

"The infringement's legitimate goal, however, is the practical implementation of the reform, by which the state is trying to achieve stronger competition among market participants, greater awareness of those saving for pension and, in their combined effect, higher pensions in the end. The measure is appropriate, necessary, and moderate, meaning that it does not infringe on the fundamental right to ownership more than is necessary for achieving the goal," Glikman Alvin Levin's analysis continued.

Withdrawal ceiling brings some constitutional concerns, not set in stone

The analysis also examines the section of the bill that which establish a ceiling of €10,100 on payouts from the second pillar. This would mean that those whose second pillar is worth more than this ceiling and who would like to withdraw money from their second pillar could be at a disadvantage.  

"We are not convinced about the constitutionality of the restriction imposed in such a fashion, but it definitely cannot be claimed unambiguously that the restriction is in an evident contradiction with the constitution, since the restriction has cogent reasons. It is [also] possible to ease the restriction to ensure its constitutionality," the analysis adds.

Paul Keres' comment

"In the conduct of the analysis, we used the methodology used by the constitutional review chamber at the Supreme Court and [by] the chancellor of justice in assessing conformity with the constitution," Paul Keres, the sworn advocate who compiled the analysis, said.

"Infringement is an altogether normal phenomenon; the question concerns its proportionality. There are two main elements to this: Whether the law has a legitimate goal and whether it outweighs possible infringements on fundamental laws," Keres continued.

"In our view, the answer to both questions is yes, since the main goal of the draft legislation is wholly cogent: To create conditions for individuals saving in a pension scheme to receive a larger pension in the future," Keres said.

The constitutional status of the ten-year bar to reentry to the second pillar to those who opt to leave it was not reported.

Justice minister's rationale behind analysis

Justice minister Raivo Aeg (Isamaa) commissioned the additional legal analysis of the pension reform bill after the financial sector's industry body, Finance Estonia, had questioned the constitutionality of the reform of the system, which had been mandatory for most working Estonian citizens since 2010.

"Since Finance Estonia called into question very specific provisions of the draft legislation, I decided to ask Glikman Alvin Levin law office to conduct an additional analysis specifically of the possible contradictions with the Constitution highlighted by Finance Estonia," Aeg said, according to BNS.

Critics of the reform had pointed to shrinking future pension pots in an aging society, as well as short term shocks to the Estonian economy, depending on how many people took the opportunity to withdraw their second pillar funds. Such people could place the money in another, managed investment fund if they wish. Both the head of the Bank of Estonia, Madis Müller, and the IMF, had expressed concerns over the reforms, including claims that not enough pre-analysis had been conducted.

Proponents of the reforms, spearheaded by Isamaa, claim that the existing system was too inflexible, and that second pillar managed funds performed worse than the market as a whole.

If the bill passes its final Riigikogu reading, it would come into law at the beginning of 2020, with individuals likely to start the process of withdrawing later in the year. The actual disbursements would be likely to come from early 2021, it is reported.

A period of one week consultation followed the bill's first draft, in early November.

Swedbank was among those who expressed concerns about the reforms at that time, in addition to Finance Estonia (though not necessarily on constitutional grounds). Other non-constitutional concerns included the cost and logistics of developing systems to deal with the volume of people leaving the second pillar.

Finance Estonia's own analysis, which led or added to the claims of potential violations of the consitution, was conducted by former justice chancellor, lawyer Allar Jõks, of Sorainen, and Toomas Vaher, of Ellex Raidla, in November.

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Editor: Andrew Whyte

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