1. Veiko Tali Ministry of Finance of Estonia May 7, 2009
World Bank Workshop Pension Systems in Times of Financial Crisis Country case: Estonia
Veiko Tali
Ministry of Finance of Estonia
May 7, 2009

2. Second pillar pension funds indexes (NAV)

3. OMX Tallinn index

4. Contributions vs pension funds assets

5. Some main features of II pillar
Optional for ca 75 % of all switchers
top-up model 2 (individidual) + 4 (social tax)
three types of funds (6 PFMC – 19 funds)
2009 – payment phase – already ca 4000 cases
5000
10000
15000
20000
25000
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
0% equity funds
25% equity funds
50% equity funds

6. NAV’s of progressive (50% equity) funds -
different ability to manage the crisis

7. NAV’s of conservative (0% equity) funds – diverged performance

8. Regulatory challenges: what we`ve missed ?
new post Lehman world or just another (deep) financial crisis: should we expect old paradigms to “die” (equity premium, long-short etc.) ?
sustainable structure of pension pillars (PAYG vs funded)
guarantees for mandatory pension funds (especially conservative funds)
how to protect victims of economic cycle – forcing pre-retirement switching to more conservative funds

9. Regulatory challenges: what we`ve missed ?
role and motivation of fund managers (active/passive, fee structure)
regularity and conditions for switching (annual or..?) self- responsibility vs. short-termism
role and ability of supervisors (FSA-s)
mandatory share of domestic investments (financing economic revival)
investment restrictions

10. Real GDP growth % 12 10 8 6 4 2 -2 -4 -6 -8
-10
1996
1998
2000
2002
2004
2006
2008
2010*

11. General government budget

12. Why changes of I and II pillar pensions ?
meet Maastricht criterias of EMU accession – 3 % of budget deficit
sustainability of state cash position (reductions, reserves, borrowing)
as a part of fiscal package (fundamental cost reductions)
encouraging consumption vs forced savings during crisis
compensation of the increase of unemployment insurance contributios rate from 0,6 to 2 %

13. Social tax from EMPLOYER Individual contribution 2%
Financing I + II pillar pensions
Social tax from EMPLOYER
Health insurance 13%
Pension insurance 20%
I pillar 16%
II pillar 4% +
Individual contribution 2%

14. I pillar pension index 2002:
50% CPI + 50% social tax fund revenues growth
Min index 1,000 (floor)
2008:
20% CPI + 80% social tax fund revenues growth
Possibility to change index after every 5 years
2009:
Possibility for Governement to reduce index if economic growth is negative or I pillar budget deficit is more than 1% of GDP (actually 1,05 instead of 1.14)
Government has to balance the reductions or increases within 5 years (taking into account also actual negative indexes)

15. I pillar indexes

16. I pillar index vs II pillar return1
1,4
1,8
2,2
2,6 3
3,4
3,8
4,2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
II pillar return
I pillar pension actual growth
I pillar formal index

17. I pillar index vs II pillar return1
1,2
1,4
1,6
1,8
2009
2010
2011
2012
2013
2014
2015
2016
2017
II pillar return
I pillar pension index

18. Temporary freezing of II pillar: base scenario

19. Optional scenario to continue own contribution

20. Optional scenario for pre-retirees (born in 1942-1951)

21. II pillar changes
temporary full ( ) and partial (2011) contribution holiday
options to continue with own contribution in 2009 (voting for II pillar)
optional compensation scheme ( ) with additional contributions (3+6), linked to economic performance 5 % nominal GDP growth rate
exemption for older generation, because they cannot reach the compensation period
not allowing switching back or taking money out of II pillar
during ,5 bn EEK missing fresh inflow to II pillar funds
during additional 4-6 bn EEK to II pillar funds
Main risk for II pillar: it happens again in future - like a drug for politicians

22. Short term state pension budget balance

23. Investment funds market (1)

24. Investment funds market (2)

25. II pillar investments by region

26. Investments into Estonia (2009 Iq)

27. Investments into Estonia (2007)