State suspends second pillar pension fund payments

Picture is illustrative.
Picture is illustrative. Source: Caro/Preuss/Scanpix

The state suspends its contributions to the so-called second pillar of the Estonian pension system today, Wednesday, set to last to August next year. The state says this will save €350 million over a two-year period, and was necessitated by the economic fallout from the coronavirus pandemic.

From October, employees can apply to suspend their payments, which comprise 2 percent of gross earnings. The state's portion is 4 percent.

The state's payment will be suspended until August 31, 2021.

The status of the second pillar had been up in the air in any case, after a government bill passed at the Riigikogu earlier this year which aims to make the employee's contributions voluntary, where they had been mandatory for most wage earners since 2010. This bill has not been signed into assent by President Kersti Kaljulaid, however, and is to be put before the Supreme Court for a decision in August.

In effect, the state is borrowing €350 million from second-pillar pension members, and the money is to be reimbursed in 2023-2024, although only in full for those who continue to make their second pillar contributions (ie the 2 percent) throughout .

Those that opt-out from October will be reimbursed for five months 'worth of payments, compared to 14 months' worth for those who do not.

The difference is significant if applied to the average wage of around €1,500 per month.

"The state contribution is about €60 per month. If a person decides to continue his contributions, the state will compensate a minimum of €840. Should they decide in October that they will not continue their contributions, the state will compensate a minimum of €300, "Swedbank investment fund manager Kristjan Tamla added ETV news show" Current Camera "(AK) Tuesday evening.

Tõnu Lillelaid, chief insurance policy specialist at the Ministry of Finance, concurred that at least there would be a difference.

"This calculation may be correct depends on it depends on the fact that if a person waives his / her two percent contribution," he said.

An exception to this is for those born before 1960, who will continue to get full reimbursement regardless of their actions.

Those wanting to opt-out of making contributions have to apply from October.

"An individual doesn't have to do anything tomorrow and in fact doesn't have a chance to do anything tomorrow. They will not have to make a decision until October of this year, when they will have the opportunity to make a statement to suspend their 2 percent payments for the period from December of this year to August of the following year (2021-ed.), "Tõnu Lillelaid told AK.

"But this is a voluntary decision, and if a person still wants to collect in the second pillar, then in fact he or she doesn't have to submit an application," he added.

Kristjan Tamla of Swednank said that it would be wise to continue to make contributions, as a previous second pillar suspension demonstrated.

"People who continued their contributions and who earned the average salary in Estonia have an average of €1,500 more in pension funds in the second pillar today than those who decided not to continue their contributions," they said.

The suspension of payments will end by September next year, when the voluntary reform of the second pillar - the brainchild of the Fatherland party and a policy it managed to get into the coalition agreement signed last year with the Center and EKRE - is planned for launch , pending the decision of the Supreme Court.

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Editor: Andrew Whyte

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