Justice chancellor: Pension reform raising questions regarding constitution

Chancellor of Justice Ülle Madise.
Chancellor of Justice Ülle Madise. Source: Anna Aurelia Minev/ERR

The government's planned pension reform raises several questions from the point of view of the constitution, Chancellor of Justice Ülle Madise finds in her position from Wednesday.

"The justice chancellor is neither against nor for the planned reform because it is a political question, while she directs the legislator's attention to known constitutional problems that have not been addressed," Madise writes in a letter to Riigikogu Finance Committee chair Aivar Kokk, adding that the constitutionality of the reform will ultimately be judged by the Supreme Court should that prove necessary.

Unequal treatment

Madise finds that the reform will result in unequal treatment in that people who have joined the second pillar of funded pension will be able to withdraw pension savings – including social tax allocated by the state – before reaching retirement age, while people who are the same age but have not joined mandatory funded pension will not be able to withdraw and use as they see fit 4 percent of social tax they've paid.

"People who have joined mandatory funded pension withdrawing their savings would cause the social tax burden of comparable groups to change retroactively. People who have not joined the second pillar will have borne greater social solidarity than those who joined the second pillar and can withdraw savings before reaching retirement age. That is why people who have the second pillar will be given an advantage in the extent of 4 percent of their social tax contribution that can be optimized retroactively compared to people 20 percent of the social tax paid by whom has always reached the national pension system," Madise writes.

Hurried changes

Secondly, the justice chancellor perceives problems with the time in which the changes should be executed that she finds too short, considering the extent of the reform.

"Amendments to the Funded Pensions Act need to be considered an important reform. The planned act will completely change the underlying principles of the funded pension system and will result in extensive reorganization of legal relationships before it can enter into force. Draft legislation reads that the act should enter into force on July 1, 2020 and parts of it even sooner (March 3, 2020). The pension investment account regulation is scheduled to enter into force on January 1, 2021. The urgency of these changes has not been sufficiently explained," Madise finds.

Retroactive implementation

Generally, an act mustn't and cannot have retroactive effect, while the planned pension reform would, Madise suggests.

"Any change that provides the right to rescind lifelong annuity contracts definitely comes as a surprise to those involved. The lifelong pension agreement is by nature a fixed-term contract – valid until the person's death. The sides of such an agreement have an especially strong expectation for new legislation not to intervene in established contractual relationships," she finds.

Leavers to affect everyone's pension assets

The justice chancellor suggests that some people withdrawing money from pension funds will inevitably affect the price of pension units and through it the value of pension assets of people who do not plan to leave the second pillar.

"Fundamentally changing collection period rules – allowing people to withdraw and take assets with them during the collection period – creates the risk of tying the value of fund units, in addition to events on financial markets and the global economy, to the behavior of other unit holders to a considerable degree.


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Editor: Marcus Turovski

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