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Estonia launches funded pensions system

ESTONIA - Estonia is to introduce a funded second pillar pensions system from January 1 next year, with expectations that around 400m Estonian kroons (e26m) could flow into funds in the first year in a system that is open to domestic and foreign banking outfits.

The country’s new act on funded pensions makes it compulsory for new entrants to the labour market to begin contributing to funds, although membership will be voluntary for current employees.

Contribution levels for employees have been set an two per cent of gross wage while employers will add four per cent out of the current 20% social tax for the first pillar pay-as-you-go (PAYG) structure.

Contributions will be collected by the tax board, with the employer responsible for withholding individual contributions.
The money will be registered centrally on individual accounts and transferred to a pension fund selected by the individual.

The pension funds themselves can be set up by banks registered in Estonia, as Pille Liimala, advisor to the Estonian Minister of Social Affairs, explains:
“ The main difference to the third pillar is that there are stricter and additional requirements, as pension funds must have a special licence to operate
“In the third pillar you also have a personal choice between insurance policies or a pension fund.
“ The second pillar money will be managed by pension funds set up principally by banks.
“Mostly these are banks already on the market like Hansapank for example, which
already have pension funds for the third pillar. But we can see new companies coming as well and these could be foreign banks also as long as they comply with all the requirements.”

Liimala says up to 50% of pension fund money can be invested in equities by the banks with no restrictions on where to invest.
“This can be outside Estonia because the market here is small so it’s unavoidable.”

Benefits, she explains, will be paid out by life insurance companies in the form of an annuity.

Current employees born between 1942 and 1951 will have to make their decision on joining by June 1, as the system will be staggered.
The collection of contributions starts on July 1 and workers have to have at least five years of contributions to claim benefits from the new system.

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