Estonia’s Ministry of Finance has published a draft law intended to provide more investment choice for pension funds and more flexibility to investment funds, and help develop local capital markets.
The proposed Investment Funds Act will relax restrictions on pension funds investing in unlisted securities and real estate, and allow them to acquire controlling stakes in companies.
The ban on investing in precious metals and related securities will also be lifted.
At present, investments in unlisted securities are limited to 10% of pension fund assets.
The new law will raise this to 30%.
For real estate, the investment limits will not change.
These investments are limited to 40% of the assets of a mandatory pension fund, and 70% for a voluntary fund.
However, for a mandatory pension fund there is also a 75% limit for investments in equity funds, shares and similar instruments.
And at present, real estate investments are considered to be equity investments – if 40% is invested in real estate, for example, only 35% may be invested in equities.
The draft law says real estate, as well as investment in infrastructure projects, should not be included when applying the limit on equities.
In addition, voluntary pension funds – i.e. third-pillar provision schemes – 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.
At present, employer contributions are not significant.
Pension fund assets in Estonia totalled €1.87bn as at 1 January, out of an aggregate €2.5bn of investment funds subject to financial supervision.
But with few companies listed on the stock exchange, it is difficult for pension funds to tap into the local economy.
The new law will enable them to support local enterprises and benefit from economic growth.
The draft Act also draws on the example of other countries, particularly Ireland, in setting out a framework for a diversified range of investment funds that can be established in Estonia.
This should enable the Estonian fund industry to offer services that can be exported, allowing the country to compete internationally as a fund domicile.
It will include the use of different investment strategies and fund managers within a sub-funds structure.
The simplified management structure for these funds is intended to reduce expenses and increase investor returns.
Märten Ross, deputy secretary general at the Ministry of Finance, said: “This change represents the renewal of regulation of the Estonian investment funds market, as well as the strengthening of its international dimension.
“The development of Estonia’s capital market will contribute to the recovery of the whole economy.”
Under the proposed Act, the rights of retail investors will be protected, with compliance monitored by the Financial Supervision Authority (FSA).
However, supervision of funds aimed at professional investors has been waived to reduce the administrative burden.
This means there will be more of an obligation on investors to monitor the activities of management companies.
Existing legislation – the Funded Pensions Act – took effect in 2004.
The government said a new consolidated Act to supersede this has become necessary because of the pace of change in the legal framework of EU investment funds, as well as fund offerings, over the past decade.
The draft Act has been published for consultation, with bodies such as the Ministry of Economic Affairs and Communications, FSA, Estonian Association of Fund Managers, Estonian Private Equity & Venture Capital Association and Bank of Estonia expected to comment.
The deadline is 11 August.
Once amended, the new law should be enacted later this year, to come into force in 2015.