While reforms to the Estonian pension scheme led to the option to invest pension funds independently via a pension investment account, uptake of these has proven far lower than was originally expected, and around 4,500 accounts are still active.
The pension investment accounts, known by their Estonian acronym as PIK, were created when membership of the second-pillar of the Estonian pension system, referring to employer/employee contributions, was made optional, whereas it had been mandatory for most wage earners since 2010.
While second pillar pension holders could cash-out and leave the scheme altogether, PIK holders have the option to control their own funds and invest them.
Peeter Schamardin, Business Development Manager at SEB Varahaldus, said when the bank rolled out the service, this was in fact done based on the assumption that it would not see a huge amount of uptake, with an estimated 5 percent of second-pillar pension savers to transfer their money to a PIK.
As it turned out, the figure ended up even lower, at fewer than 1 percent, Schamardin said.
"This much lower than expected interest could mean that those who joined the second pillar do not believe they can achieve better results on the securities market, than they did with pension funds, and did not even attempt it" he said.
Kaire Peik, head of investment and pensions at Swedbank, says the bank has around a 1,000 PIKs. "Some people have moved from PIKs back to funds, and some of the people who opened PIKs have also left the second pillar. In addition, there are also those who have opened PIKs, but never started using it," she said.
The majority of active PIK users also have an investment account, leading to the conclusion that most active investors have decided in favor of that approach. "Some people wanted to experiment, and in their cases a return to pension funds essentially from the first month could be observed."
At SEB, around a fifth of customers who transferred money to a pension investment account have bought securities, and the rest keep their money in their PIK. Two thirds of those who have transferred money to PIKs have invested the money, which, Schamardin said, implies that those with larger sums in the second pillar were more likely to invest it.
Schamardin added that it is possible that customers who have not purchased securities for their PIKs, use the accounts as a hedge against risk, in regard to their second pillar funds. While sitting in a PIK means the money does not earn interest, it does not lose out in nominal value either – at least in the short term; inflation will erode the value in the long-term, he added.
To invest successfully in a PIK, discipline, familiarity with the financial markets and consistency is required, which not everyone has and which, after an initial burst of enthusiasm, many clients will transfer money back to the pension fund, Schamardin said.
Taivo Hiielaid, investment services product manager at Estonian bank LHV, said PIKs' performance have moved in correlation with those of the markets and also of most pension funds, adding that while the median return for PIKs since they opened in September 2021 stands at -10 percent, this is not as great of a decline as experienced on the stock markets, and comparable with those of most pension funds.
LHV has been the most-used bank for setting up and maintaining PIKs (see below).
LHV's PIK investors have generally invested responsibly and with the long-term in mind, he added.
Since the liberalization of the Estonian pension fund, a policy put in place by the Isamaa party when it entered coalition with the Conservative People's Party of Estonia (EKRE) and with the Center Party (April 2019 to January 2021 – the legislation passed to set-up the reform entered in force in early 2020), over 210,000 people have applied to leave the scheme, and around 7,000 PIKs have opened in that time, of which around 4,500 are still active.
LHV accounted for 4,624 of the total 7,000, with the majority of these (3,587, or 78 percent) still in active investment use.
With Swedbank, of 1,537 PIKs, 682 are still active (44 percent), while with SEB, the figure is 212 active PIKs out of 693 in total (31 percent).
Luminor, formerly Nordea, has a modest number of PIKs – 75, with just under half of these still in use.
To constitute an active account, contributions from the second pillar must still be sent to the account; inactive accounts are those not receiving second pillar payments at present or where they have been returned to the second pillar, or simply closed down.
At Swedbank, most PIK users prefer to buy specific stocks and shares; at SEB, overseas shares, followed by Estonian shares and exchange-traded funds (ETFs) are most popular.
Payments into the second pillar for those who remained in the scheme were suspended during the Covid pandemic.
The first pillar of the national pension scheme covers the state pension, while the third pillar covered private pension plans.
Editor: Andrew Whyte