Estonian Finance ministry received substantial pension reform feedback

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Feedback and comments on the draft bill to remove the mandatory membership of the so-called second pillar of the Estonian pension scheme has been coming in thick and fast from the banking sector and also the tax authority, according to ERR’s online Estonian news.
The draft was issued only last Wednesday, by the finance ministry, with just a week’s turnaround time (i.e. by midnight on Wednesday, Nov. 6) for feedback.

The Ministry of Foreign affairs gave the green light to the draft bill as is, perhaps unsurprisingly since the reform, which would lift the obligatory requirement for pension contributions from most employees and make it voluntary, was championed by the Isamaa party; current foreign minister Urmas Reinsalu is also from Isamaa.

Social affairs ministry

Comments from the Ministry of Social Affairs have yet to be received, but the ministry says it plans to send a five-page document with its comments on Wednesday evening.

As part of the coalition government its feedback when it comes is likely to be significant.

Much more feedback, questions, suggestions and opposition to the draft bill came from representatives of the banking, business and tax spheres.

MTA

The Tax and Customs Board (MTA) says there are practical issues it has to get to groups with concerning non-residents in the scheme, and those who have joined pension schemes in the EU as a whole.

The MTA also says that IT development to take into account the reform will cost €3 million.

The second pillar fund made use of several managed pension funds; these were often used in turn as a source of investment for business in Estonia. One of these funds, Swedbank’s has so far responded.

Swedbank pension fund

Swedbank said it opposed the move as it says it will lead to lower pensions in future, echoing a stance taken by other critics, including the opposition Reform Party.

Swedbank also suggested reducing the percentage which those withdrawing from the fund to two percent, leaving four percent from an individuals social tax contributions in either the second pillar, or the first (employer contributions).

Swedbank also said that the restriction preventing those who leave the second pillar returning to it within a ten-year period, as featured in the bill at present, was unnecessary and favors allowing a return at any time.

The bank also found that with the bill making second pillar membership voluntary, other current restrictions ought to be lifted to harmonize it with the third pillar, which consists of individuals own private pension plans if they have them.

Finance Estonia

Finally Finance Estonia, an organization representing the financial sector and promoting business and financial sector development and services and comprising around 90 representative companies, also expressed reservations about the bill.

Finance Estonia said not enough analysis had been conducted – mirroring claims by the Bank of Estonia – adding that withdrawals from the second pillar may happen too rapidly and without sufficient state backup, as well as not being a level playing field for pensioners not within the scheme (for example those above the age limit for mandatory membership when this was introduced, in 2010).

Finance Estonia also feared those withdrawing may fall victim to either scams or lose money in unsecured investments they may make with their money.

It also agreed with Swedbank about removing the 10-year return limit, and said that contributions to the second pillar could even be increased by two percentage points, as well as making non-tax contributions possible in a similar way they are to the third pillar.

Deadline is Wednesday at midnight

More suggestions and comments are likely to reach the finance ministry before midnight Wednesday, in additiont to any which may miss the deadline.

“After that [deadline], we will review all the proposals. Some of these will probably also be included in the bill,” the ministry said, according to ERR’s online news in Estonian.

The ministry unveiled its detailed pension reform plan last Wednesday, under which people could start applying for releasing second pillar from as early as summer 2020.

On Monday, IMF delegation head of Estonia mission Cheikh Anta Gueye noted concerns about the potentially rapid nature of the second pillar withdrawals, as well as those around future pension sizes in an aging population, at a press conference with finance minister Martin Helme and Bank of Estonia chief Madis Müller.

According to recent surveys, the split between those who plan to leave the scheme and those who plan to stay is roughly 50:50. Of those who plan to leave, as many as 20 percent say they might invest independently in the future, and 13 percent say they would use the money for loan repayment.

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