From Monday, high street bank Swedbank is altering the limit on investing in shares across all its second pillar pension funds. This should allow for higher returns in the long run, with the bank also significantly lowering the fees of second pillar pension funds, Baltic News Service reports.
"We are changing the limits on investing in shares of all mandatory pension funds of Swedbank. This is a significant change because, based on historical analysis of financial markets, equity risk investments have yielded a better return over a longer period than other investment options," said Kristjan Tamla, CEO of Swedbank Investment Funds.
"Thus, the change gives collectors the opportunity to increase the value of their retirement assets in the long run," he added.
The current coalition government announced in August that membership of the so-called second pillar of the Estonian pension system, which concerns employee contributions, will be optional from the beginning of 2020, should the relevant law pass at the Riigikogu. Previously membership of the second pillar had been mandatory for most earners.
Arguments in favor of the reform included claims that the system as it existed was too inflexible and under-performed, compared with the economy as a whole.
Those opting in will be able to apply for a second pillar contribution to an investment account such as that at Swedbank, rather than the existing fund.
Swedbank pension funds K90-99 and K4 may start investing up to the maximum amount permitted by the new law. The maximum allowable share investments of other mandatory pension funds will also increase, BNS reports.
"Although equity investments have historically provided the highest long-term returns, their short-term volatility can be quite substantial. Therefore, in actively managed pension funds, we are gradually moving towards new benchmarks, in line with portfolio managers' vision of future financial market behavior. We still recommend pension fund K1 primarily to people who have only a few years left until their retirement, making it is essential that they preserve the value already accumulated. So, we aim to keep the risk level with this fund low, and instead of adding equity investments, we will look for opportunities in the qualitative and lower risk real estate sector," Tamla added.
The names of second pillar funds at Swedbank will be changed in September to reflect the weight of shares in the fund. The number in the fund's title will indicate the maximum percentage of share investments.
Swedbank's pension fund management fees have fallen steadily over the last five years and this year, the bank is reducing its fees for the second time, it says.
"We continue to offer actively managed pension funds with the most favorable management fees to our clients. This time, we will cut management fees by as much as a fifth, from which our clients will gain €2.5 million a year. As of September, the average management fee for Swedbank's actively managed second pillar funds is 0.66 percent, and by early next year, it will drop to 0.55 percent, according to current forecast," Tamla continued.
Editor: Andrew Whyte