Estonia’s Parliament (Riigikogu) has relaxed a number of pension fund investment rules in line with draft proposals brought forward last year that will apply to mandatory second-pillar pension funds.
The Investment Funds Amendments Act, initiated by the government, raises the limit of pension fund investment in unquoted securities from 10% to 30% of portfolios, allowing them to invest more in Estonian companies.
However, the overall 75% limit for investing in equity-based assets remains.
This limit does not include real estate investments, a change to existing law that had already recently been made.
The 10% limit on pension fund shareholdings in individual companies has also been abolished, so pension funds can now own up to 100% of any company.
The ban on investing in precious metals and related securities has been lifted; pension funds can now invest up to 5% of their portfolios in the asset class.
The rules on real estate investing largely remain the same – for instance, real estate is limited to 40% of the assets of a mandatory pension fund and 70% for a voluntary (third-pillar) fund.
However, the limit for mandatory pension scheme investment in single properties has been increased from 2% to 5% of the portfolio.
The above changes take effect from 17 July.
A complete overhaul of pension fund law is also planned, to take effect in 2016, and will include changes to the rules on pension fund structure.
Voluntary pension funds will be able to create multiple classes of units, for instance, with different fee structures.
At present, all pension fund units can be redeemed at any time, although there is an income tax charge where the unit holder redeems units before reaching the age of 55.
The new law will permit asset managers to issue a class of units that cannot be redeemed before a certain age, specified in the pension fund conditions.
This change is intended to help incentivise employers to make contributions to their employees’ pension plans.
The planned overhaul will also include measures encouraging Estonia’s development as a fund domicile.
It will enable different fund frameworks to be established, such as a common fund, a fund founded as a public limited company and a fund founded as a limited partnership.
The last of these is designed mainly for private equity and venture capital investments.
The new legislation will also protect the rights of retail investors, with compliance monitored by the Financial Supervision Authority.
However, the supervision of funds aimed at professional investors will be waived to reduce the administrative burden, placing more of an obligation on investors themselves to monitor the activities of management companies.
Silja Saar, executive director at Danske Capital AS and head of the Estonian Fund Managers’ Association, said: “The amendments aim to broaden local pension funds’ opportunities in investing in less liquid and non-listed instruments.
“Fund managers have welcomed this initiative, as it takes into consideration the local market’s specifics and therefore potentially enlarges the list of local investments available for pension funds.
“However, rapid and drastic changes in pension fund strategies or daily management shouldn’t be anticipated, as this is also a matter of realistically available instruments that would match with pension fund risk profiles and higher governance expectations.”