Funded pension system flies high
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Funded pension system flies high

03.03.03 Estonian Securities Market

The 2nd pillar pension system or the funded pension system has turned out to be one of the most successful launches of a single financial product in Estonia. It has already set a new trend in the investment behaviour of the Estonian people, and it may serve as an example for other countries facing the same task.

As of end-March 2003, some 215,390 people had joined the funded pension system since its introduction last year. It is a notable result, taking into account that the Estonian system has been built up mostly on a voluntary basis: it is compulsory only for young people who will enter the job market. In comparison with the total number of potential persons who can join the system, about half have already voted in favour of the additional pension saving system. This year, about 60,000 more people are expected to join by the next deadline of October 31.

The amount of money in the second pillar funds was 303 million EEK (19 million euros) as of end-March 2003. Analysts expect this amount to reach 800 million EEK (51 million euros) at the end of this year. Part of it is about to flow into local listed companies.

After joining the system a person will pay each month 2% of his/her gross salary to the system, and the state will add another 4%. The payments are then directed to a privately managed pension fund, chosen by the person. Today there are six fund management companies, operating altogether 15 different pension funds with three investment strategies (conservative, balanced, aggressive). 

Investment behaviour to change

The unexpectedly high number of persons joining the system is an important indicator of change in Estonians? investment behaviour, especially taking into consideration that their is no historical background neither high living standards yet to support long-time savings.
Analysts say that joining the pension fund is the first step in becoming an investor and adopting investor-like thinking. For example, during last year the investments by individuals into investment funds doubled in terms of money as well as number of investors becoming fund unit holders. At the beginning of 2003, there were 4,505 persons who had bought investment fund units, a growth of 69% during the last year.

Full pension information from Internet

HEX Tallinn launched a central web site Pension Centre (www.pensionikeskus.ee) to distribute information about the funded pension last spring. The site has grown into a full pension system information centre portal by now. As of today, the website includes information on all three pension pillars, plus additional functions such as opportunity to join the system online, check your personal pension account etc.

In the near future, HEX Tallinn plans to add information on the 1st pillar that allows a visitor to see how much money is put aside from the state pension to the personal account of a future pensioner.

The web-site has turned to be extremely successful, as the visitors of the site hit 40,000 clicks per day in autumn last year before the first joining deadline. Among its popular features is a query where employers can check whether its employees have already joined the system, a vital information for company accountants. The Pension Centre web-site has also an English and Russian language versions.

Example for other countries

Latvia launched the 2nd pillar late last year and has partly adopted the Estonian funded pension information system model, developed by Estonian CSD. Also other countries that are about to launch similar projects have shown interest in the Estonian example. The system has proven to be effective in two countries and can be successfully copied to a number of other countries.