Second pillar withdrawals slow greatly, third pillar applications rocket

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The second pillar refers to employer/employee pension contributions, and membership will be voluntary from next year. Source: Priit Mürk/ERR

The pace of withdrawal from the so-called second pillar of the Estonian pension scheme has slowed up markedly since the end of March, suggesting the bulk of those wishing to take advantage of the opportunity to leave the scheme have already done so.

While a small number (relative to the whole) of people seem to have rethought their original decision to leave – a period of grave in which to do so exists – the overall size of the second pillar fund is likely to have fallen about 25 percent so far.

At the same time, some of these funds are finding their way into the preexisting third pillar, which has grown just under 60 percent over the past year.

In the second period, which began in April, 3,569 individuals have applied to withdraw their funds, compared with over 150,000 in the first period (January-March).

Kristi Sisa, board member at the pensions center (Pensionikeskus) called it understandable that interest in withdrawing pensions has fallen off. "It was foreseen that in the first period, this the interest would be higher and from then on it would not be so great; the statistics also confirm that."

"At the moment, it seems that the vast majority of people who have made a decision, mostly in the first period, have also submitted their application," Sisa added.

At the same time, applications to cash out are not final, and can be withdrawn.

Sisa said: "The application can be withdrawn until July 31. It is inevitable that people will think about it, and some of them will pull out."

The second pillar of the three-pillar Estonian pension system refers to employer/employee contributions, which since 2010 had been mandatory for most wage earners in Estonia. A controversial bill passed by the Center/EKRE/Isamaa coalition – the policy was the brainchild of the last of these three parties – liberalized the system and allowed all those who wanted to opt out to do so, starting from the beginning of this year.

The first pillar refers to the state pension and the third pillar consists of voluntary private pension schemes.

The current, second period of applications to withdraw from the second pillar runs until the end of July, with the third and final period to run from August 1 to November 30.

Funds will not actually be available until later; those who applied successfully in the first period will get their money, as a lump sum, in the fall.

Figures show 152,179 valid applications extant as of the time of writing from the first, January-March period. 152,675 were originally received, meaning around 496 applications have been withdrawn by their applicants.

The amount to be disbursed from period one comes to €1.29 billion, or a little under €8,500 per applicant on average. The €1.29 billion constitutes nearly 25 percent of the second pillar fund as it stood on the eve of the law change allowing withdrawal.

Estonian bank LHV has received 2,107 new account holders for pension investment accounts – i.e. those who cashed out of the state system mainly, in effect joining the third pillar – compared with 373 at Swedbank, 129 at SEB and 21 at Luminor.

Proponents of the change argued that the public should have more control over their finances, and claimed that the managed funds in the static second pillar performed below the market average.

Opponents said that it set up inequalities between formerly equal pension-holders, both in relation to those who remained in the second pillar versus those who left it, and in the interface with the first pillar (state pension). President Kersti Kaljulaid declined to sign the pensions reform bill into being last year, which resulted in the matter going to the Supreme Court. The latter rejected the president's appeal.

The state suspended its contributions to the second pillar at the end of last year.

Additionally, critics said that the change smacked of short-termism and that it would lead to a shorter term surge in spending power within the economy, followed by both a fall in this and a shrinking pension pot.

It has recently been claimed that the increased liquidity is leading to a real estate bubble, at least in Tallinn and environs, after those withdrawing money have used it as down-payment on a property.

AK: Third pillar grows by 59 percent on year

While the distinction between the second and third pillars could be argued to have blurred following the reforms, the latter has in any case grown, by nearly 60 percent, on year to the first quarter of 2021 (Q1 2021), ETV news show "Aktuaalne kaamera" (AK) reported Wednesday night.

While this resulted in part from a surge in new accounts opened at the end of last year, developments on the global markets also had an impact, AK reported.

A legal amendment echoed that of the second pillar reform, as well, since withdrawal from the third pillar on preferential terms and five years before retirement age is now possible, AK found.

In Q1 2021, third pillar funds stood at €280 million, a rose of 59 percent on year, and 10 percent on the previous quarter.

This still makes the third pillar around 7 percent the size of the second pillar even after the withdrawals from the latter so far.

The "third pillar effect" has, however, had a knock-on effect on other, albeit related areas, pensions and investment manager at Swedbank Kaire Peik told AK.

Peik said: "In addition to the third pillar, interest in all kinds of investment opportunities has grown exponentially. Of course, it makes the most sense to take advantage of this tax incentive, but we also see Swedbank's number of securities accounts growing exponentially over the past year and people's investment interest has grown markedly."

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Editor: Andrew Whyte

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