Increased competition, greater transparency on fees and higher investment in the local economy were the themes at a roundtable on Estonia’s mandatory second-pillar pension funds convened by finance minister Sven Sester at the end of May.
The event included representatives from the pension industry, FinanceEstonia, the Financial Supervision Authority, central bank and employer and business organisations.
Sester expressed concern about increasing concentration in the pensions market – the number of providers is shrinking to four following LHV Varahaldus’s acquisition of Danske Capital’s Estonian operation last month – adding that the ministry was looking at ways to help new funds enter.
Krisjan Tamla, chief executive at Swedbank Investment Funds, told IPE: “Very low competition is in nobody’s interest, as such situations often tend to be accompanied by more legal restrictions, so we welcome all new market participants – provided they are allowed to enter on ‘non-subsidised’ terms.”
At the same time, he emphasised that, in a market of Estonia’s size, with less than €3bn in assets under management, it was unreasonable to expect a large number of service providers, adding that the number of retail banks also remained small.
At the roundtable, Sester linked the issue of increasing fee transparency with competition.
Citing OECD data that shows Estonian pension fees are relatively high, he announced that, since the rules on charges changed, the average management fee was down to 1.25% at the end of 2015, and set to fall to below 1% by 2019.
Increasing pension fund investments in the local economy will prove a challenge for a sector that has always invested most of its assets abroad.
One of the distinguishing features of the Estonian economy is that the sovereign bond market is negligible, as the state has issued very little debt.
Local investment opportunities have expanded since mid-2015 after pension funds were allowed to increase holdings in unlisted companies and real estate, and acquire controlling stakes in companies.
According to Estonia’s Financial Supervision Authority, the mandatory and voluntary pension funds had 27% and 21% of their respective investments in Estonian assets as of the end of this March.
Trade and industry representatives have long wanted to see a higher share; in April, the Estonian Chamber of Commerce and Industry called for statutory minimum limits, of 35% by 2019 and 45% the following year.
Meanwhile, Sester called for pension fund investment into state-owned companies.
Tamla told IPE his company’s pension funds had over the past two years consistently increased the allocation to local assets, to around 25% of last year’s annual net flow.
“Investments in the local economy could be facilitated in three main ways: partial privatisation of state-owned enterprises, a larger diversification of debt capital by state-owned companies, which currently rely largely on bank financing, and more activity in setting up local private equity funds,” he said.