State pays up €270 million in suspended second pillar pension contributions

The second pillar (II sammas) refers to employer/employee pension contributions.
The second pillar (II sammas) refers to employer/employee pension contributions. Source: Priit Mürk/ERR

Close to 342,000 people will be paid a total of €270 million from the second pillar of the Estonian pension scheme, for the month of January, the Ministry of Finance says.

The payments had been suspended from an earlier time period, due to state budget issues in the face of the coronavirus pandemic's economic effects.

Ministry of Finance top specialist Tõnu Lillelaid said that on average the payment will come to €780 per pension collector. "They will get an additional €20 in interest; in total they will get back somewhere around €800," he said.

Kristjan Tamla, who managed Swedbank's pension funds at the time the payment suspension was made, told ERR that the government had made an extremely unreasonable decision in halting the disbursements.

A loan could have been taken to plug state budget gaps, he said, at a time when interest rates were practically zero, whereas instead the state "gambled" by taking money from pension fund holders without the knowledge of the cost of subsequent repayments.

Tamla said: "When a person goes to the bank and asks that bank that for a loan for two-and-a-half years. The bank says that they can get a loan. We then have two options. Option number one the interest on the loan is zero, option number two comes with an 80 percent probability the interest is higher than zero. Just how big, it will become clearer when the two-and-a-half years are finished. Each person can then think for themselves which option they would choose in that situation," in other words likening the state's actions to the latter option, whereas presumably that would not be the one the individual person would take.

Furthermore, €22 million of the returns are essentially being paid by those who had not been collect money in the second pillar, he went on, while an euqal refund is not equitable, he said. "Those who save in higher-risk funds lost; their returns would have been significantly higher than nine percent. And those who save in lower-risk conservative funds won, because their returns were sometimes even in the negative."

Nine percent was the average return of the second pillar funds.

The second pillar refers to employer/employee pension contributions, of 2 percent of the salary each, mandatory for most Estonian wage earners for over a decade, until the Center/EKRE/Isamaa coalition liberalized the system to allow second pillar holders to opt out.

The first pillar refers to the state pension, the third, to private pension schemes.

The payouts above refer to those who opted to remain in the scheme.

In January, people born in 1961 or later who had made their two percent contributions between July 1, 2020 and August 31, 2021, and have not left the second pillar in the meantime, will be paid the four percent payment (ie. their and their employer's contribution).

The sum is based on payments of two percent of the accumulated pension calculated from the income declared to the Tax and Customs Board (MTA) in the same period period, by simply multiplying the amount of these payments by two, considering the average return of the second pillar pension funds over the same period to be 8.9 percent.

These amounts will be disbursed at the end of this month, or transferred to a pension investment account if appropriate.

Those who leave the second pillar in January will also receive the same compensation.

The second pillar payments were suspended for a total of 14 months between 2020 and 2021 as the Covid pandemic's economic effects became known, with the pledge that payments would be compensated to those remaining in the pillar in 2023 and 2024.

In September 2022, the government decided to make this payment as one lump sum.

Those born in 1960 or earlier did not have their second pillar payments suspended in the first place and are therefore not affected by compensation. 

Those who left the second pillar in 2021 to 2022 received their compensation from the suspended contributions in the same month they cashed out from the second pillar.

Riigikogu finance committee chair Aivar Kokk (Isamaa) said that the move had been worth it, in taking a loan out at 9 percent, in effect.

"The state has been able to use cheap money for several years. We can see what inflation has done today, as the value of money is much lower today than it was a few years ago, when this decision was made," Kokk said.

Making the membership of the second pillar optional was an Isamaa-sponsored policy, which the party was able to get into the coalition agreement signed with Center and EKRE in April 2019. This lineup stayed in office until January 2021.

More information on the Estonian pension system is here.


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Editor: Andrew Whyte, Toomas Pott, Marko Tooming

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