"News portal headlines are claiming last year was very successful for pensions funds," Neivelt wrote on his social media account Friday.

"As ever, these headlines are deceptive. On the surface, the returns on the funds look good, but if you dig a little deeper, things are not quite what they seem. But why?" he continued.

Answering his own question, Neivelt said that the higher-yielding funds were small in volume; the top five best performing funds make up only 5 percent of volume, he said.

"Among the top four funds are those which fund managers have not even laid their hands ... these are index funds," he added.

The average yield of Estonian pension funds was 9.5 per cent in 2019; however the Swedish national pension fund AP7 was three times this, even allowing for the weakening of he Swedish Krona against the Euro, Neivelt continued.

"Unfortunately, my slogan from a year ago that our pension fund returns are twice as bad as they could be [still stands]," Neivelt added. 

"I understand very well that one year is too short a period to draw conclusions, but still - the difference was three times! Even if the markets were to decline, their funds could fall more from a higher base."

Neivelt added that when comparisons with pension funds from other countries emerge over time, it will be interesting to look at the number of Estonian funds in Europe last year. 

"The markets were just having a very good year and everywhere showed very good results. Our 9.5 percent is definitely nothing special."

As to explanations why this was the case, Neivelt pointed to inefficiencies in types of investments and the way these were handled.

"First of all, our people have mostly invested money in funds which contain more bonds. Whereas this was justifiable 20 years ago, after joining the euro and with heavy cash printing, this will no longer be so."

"Second, our fund managers are still trying to actively manage funds to justify the high fees. It would be better to broker an index fund or simply outsource this service. It is not viable that our fund managers are among the best in the world," he noted.

As reported on ERR News 2019 was claimed as the second best year in the history of Estonian second pillar pension funds after 2009, when financial markets began to recover from the crisis.

As of January 2, the highest return came with the SEB Fund Index 100 at - 28.05 percent, followed by Swedbank K1990-1999 at 27.83 percent, LHV Index Fund at 26.79 percent, Future World Equity at 22.72 percent and Luminor A plus at 21.03 percent.

The strong performance of pension funds was also largely due torule changes last year which allowed investments to take place more freely. The most positive year in the world financial markets over the past decade has also driven index funds to grow.

The coalition government is in the process of making membership of the so-called second pillar of the Estonian pension system, referring to employee contributions, voluntary. Since 2010 it had been mandatory for most wage earners.

Arguments in favor of the change included that the existing system's investments performed below the market rate.

Arguments against, echoed by both the Bank of Estonia and the IMF, included short-term shocks to the economy if large numbers of people withdraw their second pillar funds all at once, as well as how to cater for retirement among an ageing population in future years.

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