Suspending pension payments could cost state over €10 million

Money (photo is illustrative).
Money (photo is illustrative). Source: Emilian Robert Vicol / Pixabay

The state has to return a total of almost €280 million to applicants drawing out of the second pillar pension fund, which have been suspended for 14 months. As pension funds are currently showing good returns, the state should only pay up to €100 million to pension savers to compensate for the growth, Joel Kukemelk, head of Estonian bank LHV's pension fund says.

From July last year, the state suspended 4 percent contributions to the second pillar, at the expense of social tax. In September, the state resumed these payments. The government has promised that the uncollected pension money will be compensated as additional payments in 2023 and 2024, with the average return being compensated if it is positive from the moment of suspension until the end of next year.

The Ministry of Finance has estimated that the repayment will cost €138 million over both years.

"This is actually calculated with interest, based on the historical average return of pension funds, which is in the order of four percent per year. And considering that period of two and a half years, the application would be a little over 10 percent, which has been included in the prediction," adviser to the Ministry of Finance Kertu Fedotov said.

"If, in fact, the return is higher than average than it has been before, the state will have to spend more on compensation," Fedotov added.

LHV fund manager Joel Kukemelk said the average return of pension funds has been 16 percent in the intervening 14 months.

"Broadly, the tax that the state has not taken in is €300 million. 16 percent of that is about €50 million. In fact, this €50 million is money from all our Estonian taxpayers which has simply disappeared due to a very bad decision," Kukemelk said.

"If, from now on, the return on the funds is zero for the next year and a half, then that figure will continue to be €50 million. If the return of the funds is the same for the next year and a half as it has been for the last year and a half, then this figure would simply be twice as high, "said Kukemelk.

Helir-Valdor Seeder, Isamaa leader and the author of the pension reform, said that the state has the funds to cover these expenses.

"The state budget receives income tax, which is coming through additionally to the state budget, which is relatively free to use, can be used for various expenses and then the social tax is released to the first pillar, which is the state pension. And this money can only be used to pay pensions," Seeder said.

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Editor: Roberta Vaino

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