OREANDA-NEWS.  June 19, 2012. According to SEB’s forecast, EUR 30 billion will need to be accumulated in the 2nd and 3rd pension pillars by 2040 for this generation to receive a pension they can live on. Over the past ten years, approximately EUR 1 billion has been accumulated in the pension pillars. At this rate, the next thirty years will see the value of pension assets reach EUR 12 billion, which, however, will not be enough for all the people of Estonia to receive a pension, reported the press-centre of SEB.

“The EU social code provides that the minimum pension should amount to 40 per cent of a citizen’s last income before retiring. In recent years, the ratio of the mean pension to the net earnings in Estonia has stayed close to that figure; however, compared to other EU Member States, it is one of the lowest. The mean replacement rate in the EU amounts to approximately 65 per cent, which should be Estonia’s target, too,” said Indrek Holst, Chairman of the Management Board at SEB Elu- ja Pensionikindlustus.

Sixty-seven per cent of people are looking to the state-provided pension to fund their old age, 47 per cent to the 2nd pillar and 14 to the 3rd pillar, revealed a survey conducted by SEB and TNS Emor last May. Of those surveyed, 20 per cent thought that their pension should amount to 80 per cent of their pre-retirement income, whereas 40 per cent would settle for a rate of 60 per cent.

“People’s expectations for the pension system are high; however, the fact that the number of people in the workforce funding pensions is dwindling every year – along with the limited cash reserves of the population – present challenges to the provision of a decent pension. If currently one pensioner is provided for by 1.5 people in the workforce, in 2040 there will be one person in the workforce for each pensioner, which will cause a difficult situation when it comes to the disbursement of state pensions,” Holst added.

In order for people to enjoy 20 or more years of care-free retirement, each person would have to amass an estimated EUR 66 000. When all pensioners are tallied up, the shortfall is EUR 18 billion. There are several options to come up with additional money to fund pensions, and one of the potential solutions to fund the missing EUR 18 billion would be improvement of the 3rd pillar, which, now that ten years have passed, is not working.

“Today, the 3rd pension pillar, which would help to ensure the desired replacement rate of 65 per cent, has been joined by approximately 130 000 people, which is four and a half times less than those accumulating their pensions in the 2nd pillar. The 3rd pension pillar has EUR 0.255 billion, or 4.4 times less than the 2nd pillar. Per person, EUR 1700 has been accumulated in the 3rd pillar. These facts indicate clearly that the 3rd pillar is not doing its job to the full extent,” Indrek Holst added. “For ten years, discussions around the Estonian pension system have addressed only potential cosmetic changes to the entire system. In order for an Estonian funded pension system to be sustainable, ad hoc changes need to be given up and focus needs to be directed at the funding of the pension system long-term,” Holst summed up.