Research finds public not clear on second pillar pension reform

Abolition of the second pillar of pension (illustrative)
Abolition of the second pillar of pension (illustrative) Source: Caro/Preuss/Scanpix

If the law making the so-called second pillar pension contributions becomes reality, close to half of those already in the system would continue, with a slightly smaller figure saying they would take the money, according to recent research, which reveals possible divided opinion on the matter as well as a lack of clarity on how pension reform may pan out.

The survey, conducted by pollsters Turu-uuringute on behalf of the Estonian Insurance Association (EKsL), gave the exact figure of 44 percent who would remain in the second pillar, which comprises employee contributions, and 41 percent who would leave, BNS reports.

Critics of the current system pointed to its inflexibility, claiming second pillar funds perform less well than the economy as a whole. Opponents of removing the second pillar or making it optional, a central plank of coalition party Isamaa's election manifesto, say doing so would hit lower earners hardest.

Mart Jesse of the EKsL said that the survey's findings revealed the range of expectations people have regarding pension reform.

"Whereas almost half of the people [polled] intend to continue investing their pension assets and understand the inevitability of saving for a pension, another [near-]half intend to withdraw the money. This demonstrates people's low trust in funded pensions," Jesse said, according to BNS, noting that the total accumulated in the second pillar to date comes to €5 billion.

"These attitudes have evolved against the backdrop of communication by government parties as well as media noise. People's actual behavior depends on what the specific conditions for the withdrawal of money are to be. In any case, making funded pensions voluntary will have a major impact on the economic environment, inflation and also the welfare of the elderly in the decades to come," Jesse added.

Of those who would leave the scheme, the greater part would invest the withdrawn money themselves were unable to name their reasons for doing so. Twenty-nine percent would invest their withdrawn funds themselves, and 11 percent would use the money to pay off debts and expenses, according to BNS.

Jesse also urged caution with regard to the future, should people raid their pension pots in a hurry.

"It is essential that the reform of funded pensions take place in a thought-though manner and considering all impacts. People need to be informed, in an unambiguous and credible manner, where the state will take money from for the payment of pensions under conditions of an aging population in the future, when the second pension pillar that is mandatory at present is taken apart," said Jesse.

"The belief that allowing the withdrawal of pension savings by persons of working age will ensure them security during retirement has not been confirmed in the international practice of social insurance, and is obviously wishful thinking," Jesse added. 

The EKsL does not oppose making the pensions system more flexible, but says exiting the second pillar should be made an exception, not a rule.

The Turu-uuringute web-based questionnaire for the survey completed in July was filled out by 1,015 people aged 18-64.

Central bank's initial analysis

The Bank of Estonia is also set to conduct impact analysis of the proposed changes and urged caution as well.

"A few weeks ago, the scope of possible changes was made public. The Riigikogu wants to adopt the amendments by the end of this year. Such a rapid pace does not allow an in-depth analysis of all the consequences of such a major restructuring," Madis Müller, Bank of Estonian chair, said, according to a bank press release.

"However, we will certainly do our best to help both the government and the parliament make the most informed decisions. As a central bank, we will first try to assess what the immediate impact of a change in the pension system may be on the rise in prices and the Estonian economy," Müller continued. 

"Nevertheless, it is also important to analyze the long-term impact of the changes, for example on the sustainability of public finances. Our aim is to provide initial answers to these questions by mid-October at the latest," Müller added.

Earlier Bank of Estonia analysis by economist Jaanika Meriküll found that those who were in the second pillar already were likely to save more for retirement than those who had not joined it.

In July, the International Monetary Fund (IMF) also expressed concerns about the proposed pension reforms in Estonia, on the grounds of budgetary risk, long term effects, and the lack of in-depth analysis.

Mandatory since 2010

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.

Mandatory from 2010, those born in or after 1983 must pay into the second pillar; those born between 1942 and 1982 had the choice to opt out when the scheme was first introduced.

If the law enacting the reform passes at the Riigikogu, finance minister Martin Helme (EKRE) said in August, it would come into effect at the beginning of 2020, people would be able to start leaving the scheme in July, and the first disbursements would start arriving at the beginning of 2021.

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Editor: Andrew Whyte

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