ESTONIA - Current legal practices regarding the indexation of pension benefits is the major factor behind the destabilization of Estonian finances, the International Monetary Fund (IMF) has found.

Government "regularly increases pensions by more than what is required" under the indexation rules, the IMF noted in its latest country report on Estonia.

According to the organisation, this step is necessary because current indexation regulation, with equal weights to inflation and wage bill growth, "would reduce a benefit, ratio that is already among the lowest in Europe".

However, "pension benefits over the past five years have grown even faster than wages" because of the ad-hoc pension increases, the IMF said, adding "a continuation of these ad-hoc pension increases is not sustainable".

Estonia is therefore urged to come up with an indexation rule which "avoids excessive ad hoc pension hikes, but does not erode the benefit ratio".

The IMF calculated a continuation of the current practices and legislation would see "age-related expenditures on pensions and health care gradually increase by about 6.5 percentage points of the GDP by 2050".

However, the organisation stated while the "adjustment needed to ensure fiscal sustainability is not trivial" it is "within reach thanks to the current solid fiscal position".