It’s difficult to predict how many people will give up their second pillars after the pension reform and what its actual impact on the entire system will be, concluded economic experts at Luminor’s pension reform discussion. The experts believe that due to their poor financial literacy, people will just spend the money after withdrawing it.

“It’s clear that the second pension pillar will be reformed,” said Head of Asset Management and Pensions at Luminor Baltic Rasmus Pikkani. “The question we have to ask is what happens next? When we discuss the pros and cons of the legal amendment, we also have to think about the responsibility that comes with freedom. If I decide that I’m not going to save, someone else will have to pay for this. If we just fritter our money away, then 30 years down the line we’ll be explaining to our children that they now have to support us.” In his opinion, the rushed reform reminds him of the abolishment of traffic restrictions. “We say that people are smart and understand how traffic works,” said Pikkani. “But I’m not the only one participating in traffic, there are also others who are affected by my manoeuvres and vice versa. No matter how smart you are, what are you going to do when a lorry heading towards you is behaving according traffic regulations that are unknown to you?”

Only a fortune teller can predict the outcomes of the pension reform

Investor Raivo Hein’s advice at the panel discussion was to continue saving and ignore the goings-on. “When we look at statistics, then which portfolios have generated the best returns over the years?” asked Hein. “The ones that have been forgotten or the ones whose owners have died. We are changing a system that is 20 years old, but the system itself is like compound interest – it will start working in the end. We should look at the results after 50 to 70 years. We might as well go to a fortune teller if we wanted to predict the consequences of the current pension reform. We don’t know what banks will do or what people will do. We speak about investing the money, but look at Toomas of Äripäev, for example, who has increased his portfolio for 20 years – it’s a full-time job.”

Experience of other countries: reforms should not be rushed

According to Magnus Piirits, an analyst at Praxis, all European countries are dealing with the same problem at the moment – the changing demographic situation, which pushes the boundaries of the adequacy of retirement savings. “In order to improve things, other countries are increasing people’s own responsibility for guaranteeing their income in retirement, but this requires better financial literacy from people,” he said. “The danger that people will just spend the money is very real. As pensions depend on the decisions we made in the past and will make in the future, then we should not change the system in a rush, as there are many factors that need to be considered, some of which are difficult to reverse.”

President of the Lithuanian Investment and Pension Funds Management Association Šarūnas Ruzgys, who also participated in the event, spoke about the lessons learned from the recent pension reform in Lithuania. “It’s positive that people’s awareness of pensions and their interest in contributing more to their savings increased as a result of the discussions surrounding the reform,” he said. “But this was the third major reform, which reduced people’s confidence in the system and increased their insecurity about the future. The clumsy legislation that regulates payouts and the pretty nominal support of the state did nothing to make things better.”

Former Governor of Eesti Pank Ardo Hansson spoke about the pension reform in Poland as an example. “The pension system of Poland was demolished. A couple of years later, the government came together, took a look at the consequences and realised that they would have to start building a similar system again. Just a clumsier and more expensive one. The reform bets too much on the capacities of the first pension pillar. If the first pillar is the only one left, the entire pension system will become too dependent on the performance of the economy of Estonia and the decisions of politicians.”

Threat: people who save for pensions are too easily led

Leading expert of behavioural sciences at Kantar Emor Heidi Reinson, who also attended Luminor’s pension discussion, said that the behaviour of consumers indicates that the percentage of the discount is often more important than the final price of the goods when people make decisions. “In the debate about the second pillar, the focus has shifted to the percentages – saving seems unreasonable if the returns are too low,” she said.
“There is some financial logic in this, of course, but if we focus on the interest rates, we may forget that we’re saving for our future and this is a value in itself.”

In her opinion, consumers must be prepared for being influenced from right, left and centre after the act is enforced. “The government has made its decision, but the people haven’t made theirs yet,” added Reinson. “Soon, we’ll probably see new financial products that are after people’s second pillar money and lots of advertisements aimed at getting people to spend it. Also, the number of people who will withdraw their money from the second pillar depends on how simple or complicated the process will be.”
Photos (Marek Metslaid)
Watch the live Facebook recording of today’s event ​here
Presentations of the speakers (Magnus Piirits, Šarūnas Ruzgys, Heidi Reinson):
For further information please contact: Martin Kõrv