Estonia’s shrinking pension fund landscape may soon have a new player, operating on a profit-sharing cooperative model.
Tuleva, started up by 22 prominent Estonian financial and business individuals, has been established as a commercial organisation, a collective of members with similar interests, with each member holding one vote, in contrast to the four existing bank-owned market players.
“The market for the second pillar fund system is uncompetitive, and returns since its launch in 2002 have been poor,” Tuleva board member Tõnu Pekk told IPE.
The association is building up capital to set up a second-pillar pension fund management company, which under current Estonian law needs a minimum capital of €3m, as well as funds to finance costs such as regulatory, legal and depositary expenses.
By Tuleva’s reckoning, the management company, once established, will be sustainable once 3,000 members join and transfer their existing second pillar savings.
The mandatory second pillar currently has close to 685,870 member and €2.7bn of assets.
As of 23 August the association was half way past its target, with €1.53m of capital collected since the end of April, and a membership of 1,700 acquired entirely by social media and word-of-mouth.
Members pay an up-front fee of €100 and pledge to bring in their second-pillar savings.
The first 3,000 members can also make an additional voluntary contribution of between €1,000 and €10,000 to the start-up capital, fully returnable if the fund management company is not established by the end of next July, in return for a higher profit share.
According to Pekk, a former chief executive of GA Fund Management who has also worked for PwC and the European Bank for Reconstruction and Development, 0.05% of the Tuleva’s AUM will be distributed among the members according to the size of their pension account in Tuleva funds, while the rest of the profit – both from the business as well as investment income of the start-up capital – will be distributed among all members according to their contribution to start-up capital.
In addition to the novel ownership structure, Tuleva intends to charge lower management fees, a contentious issue in the Estonian pensions market. According to Pekk, management fees currently average 1.26%, while the total expenses ratio is some 1.5-2%.
Tuleva will initially charge a management fee of 0.5%, reducing this when the membership increases.
It intends to achieve the lower costs through a fully passive investment strategy – 75% invested in the MSCI All Country World Index and 25% in the Barclay Capital Global Aggregate Index – using mostly BlackRock as its provider.
Pekk told IPE that Tuleva hopes to have the necessary documentation ready by September and the finances in place by the end of October, with the pension fund launching next year pending regulatory approval.
Estonia’s finance ministry, meanwhile, which itself called for greater competition and fee transparency, is incorporating two of Tuleva’s proposals into forthcoming amendments to financial legislation.
The current exit fee for pension fund members switching providers is to fall from 1% of assets to 0.1%, while the minimum share capital will be cut to €1m.
Tuleva is not alone in turning to passive investment to cut fees.
This week LHV announced that it plans to launch two new passive index funds – a second-pillar fund 75% invested in equities, and a third pillar one fully invested in equities - each of which will charge a management fee of 0.39%.
LHV plans to receive the regulatory go-ahead for its new offerings later this year.