Estonia's pension savers not put off by fall in world stock markets

Euro coins and bills.
Euro coins and bills. Source: Anna Pavlenko/Raadio 4

The world's stock markets have been volatile this year and, while assets in pension funds are falling, Estonian wage-earners have for the most part remained loyal to the existing pension system with little movement between funds taking place, ERR reports.

In the third quarter of this year, second pillar pension funds (referring to employer/employee contributions – ed.) fell by six percent, or €270 million by annual comparison. In the second quarter, the decrease was even greater: 19 percent or €1.3 billion. However, according to fund managers, this has not made people look for more profitable investment places.

More than 500,000 are members of the second pillar, membership of which was made optional during the Center/EKRE/Isamaa administration which left office in early 2021; savers' funds are mostly held in Swedbank pension funds, Age Petter, head of Swedbank Investeerimisfondid AS, to,d ERR.

Petter said: "Market volatility this year has led to perhaps an increased interest and awareness of what investments mean, what the rallies and troughs in the stock market are and how they affect everything."

"If you look at the movement between the funds, or in general in the accumulation in the second pillar, it is clear that the pension reform has made the biggest impact."

Since September, however, the largest pension fund in Estonia has been LHV Pensionifond L, and also happens to have given the best return on the market in the last 12 months, Vahur Vallistu, head of LHV Asset Management, told ERR:

Vallistu said: "Three LHV funds - M, L and XL - have a positive return. L is almost four percent, if you look at the current year."

"We have seen that in the last six months, the movement of people into this fund has been the largest. In LHV funds as a whole, this year we are took from competitors rather than giving it away," Vallistu continued.

Petter said that the same had happened at Swedbank, looking at patterns of the movement of customers on those dates when it is possible to switch funds or receive payouts. 

"Over the course one switch period, approximately 3,000-4,000 applications are made to join our funds, while 2,000-3,000 more applications are made from our fund holders to go to a competitor," she added.

Only three funds continued to give positive returns

In terms of performance, only three LHV funds have made a positive return from among all Estonian pension funds over the past year, ERR reports.

At the same time, all specialists have stressed that pension savings are a long-term investment, adding that annual fluctuations should not be a cause for major concern.

On the other hand, there are those people who believe that actively over-managed pension funds end up being more harmful than passively managed and relatively safe funds which invest in index-linked funds.

The future cooperative (Tuleva ühistu) was created several years ago for this very purpose - to make administrative costs more affordable by funds being invested in index funds.

However, this cooperative's investments are also shrinking, fund manager Tõnu Pekk conceded. "Accumulators in our pension funds earn at the average return of the world market. This is our goal. Every month we purchases shares from the world's largest companies, both in good times and in bad. Since the beginning of this year, these share prices have fallen, however, so since the beginning of this year, the unit value of our fund has also fallen in line with world share prices."

However, Pekk emphasized that investors into the future cooperative are well informed and know that the best way to achieve good returns in the future is to continue buying shares regularly, both when prices fall and when prices rise.

The cooperative is also a growth area, he said. "There are always people leaving, but there are many times less people leaving our funds than banks' funds, and collectors continue to make regular contributions. As a result, the volume of our pension funds has increased this year, despite the drop in stock prices."

At the same time, investment in the "third pillar", referring to private pension schemes, has also been growing year-on-year, by 17 percent over the past year, to €400 million approximately, the fund managers said.

fund management companies confirmed that the interest in investing in the III pension pillar is constantly growing every year. The total amount of assets there is about 400 million, having grown by 17 percent over the year.

Tõnu Pekk said: "Before saving elsewhere, it is wise to take advantage of the third pillar with its excellent tax discount, in which you put in €100, then the state immediately pays you back €20 in income tax. This opportunity must be used first, and only then should you start looking at alternatives."

The "first pillar" of the Estonian pension system refers to the state pension.

More information on the Estonian pension system is here.


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Editor: Andrew Whyte

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