Estonia's financial supervisor, the Finantsinspektsioon is worried by a lack of competition in the pensions market. The chairman of the supervisory authority, Raul Malmstein, expressed his concern as the finance ministry is preparing to announce amendments to the current pensions law.
As with other CEE countries, Estonia adopted a variation of the World Bank three pillar model, where a percentage of the contributions to the state old age pension system are paid into personal accounts managed by private pension management companies. Participants can choose which fund to join.
Estonia has adopted a method whereby 2% of a salary flows into the pension fund and the state adds an additional 4% from the participant's personal social security account.
The Finantsinspektsioon is concerned that three factors have contributed to a limiting of competition.
"First, there is the fee structure," Malmstein said. "From a supervisory perspective there are certain situations in the market where the fees that pension fund mangers are charging, and which are currently acceptable by law, are not very transparent. This is one of the reasons why price competition in the market is not functioning.
"The second factor is that it is expensive to switch funds, and indeed there are certain obstacles or hurdles for investors to changing a fund. It also does not support price competition.
"Third, and this is specific to the structure of the Estonian financial sector, we can identify certain situations where market concentration is very high. And this also has a certain potential impact on price competition.
"So all those elements together can lead to the situation where actually market participants find there is no particular need to be very competitive at the price level."
Malmstein's comments come as the finance ministry is preparing to amend the current law. "This has been a quite lengthy process and it looks as if we are in the finishing stretch," said Malmstein. "Technically all regulations come from the finance ministry. The supervisory authority has a consultative role but we are not technically writing new laws."
Currently, pension fund companies are allowed to charge three types of fees: an issuing fee that they charge on a monthly basis when contributions are paid in. This fee is levied for issuing new units to the value of the contribution into a personal account. Most companies charge a 1% fee, although one market participant charges a 3% fee on a monthly basis, said Malmstein.
In addition there is a management fee, which again varies. "The companies offer three types of funds with a different risk profile where the level of risk is capped by law," Malmstein said. "On average for the more aggressive funds, which are currently allowed up to 50% equity exposure, the management fee can vary between 150-200 bps. But the most conservative funds, which only invest in fixed income, charge fees that vary between 100-130 bps.
Companies also charge those wishing to move their account to another fund manager a redemption fee of 1%. They will charge the same to those who reach retirement age.
"However, in a country with only 1.3m inhabitants and where 560,000 people have already joined the second pillar, it should be much easier for people to freely move between funds if they want. Most people will never change their fund but if some people are either more price sensitive or looking for new strategies it should not bring high costs to move," continued Malmstein.
"Because the fund managers are using slightly different strategies and fee structures it is very difficult for an ordinary person to calculate, compare and understand how those prices work altogether and so what is the best solution for them. And because those fees potentially can change over time it is almost impossible to estimate or compare the potential fees."
The finance ministry's draft proposals for an amendment to the pension fund law foresees the elimination of the issuing fee, says Malmstein. "Maybe there will be last minute changes so I can't guarantee that the draft law will remains intact, but currently they propose that in a couple of years it will be prohibited," he said.
"And there will be a certain regressive structure on management fees which means that the fees will decrease when the fund reaches a certain amount."