The Bill on the mandatory funded pension reform, which will make the mandatory funded pension voluntary, passed the first reading in the Riigikogu.
The Bill will make amendments to the regulation of the second pillar pension scheme by introducing additional options for persons contributing towards their pension. The major amendments made by the Bill are the following. The people will have the right to decide whether to contribute towards their pension in the second pillar or not – both those who have already joined the second pillar pension scheme before the amendments enter into force, and those who have not. In addition to contributing towards pension funds, after the entry into force of the amendments, it will also be possible to contribute through a pension investment account. On certain conditions, people will be entitled to withdraw the money contributed towards their second pillar pension scheme already at the time of contributing towards their pension. When the person reaches the retirement age, it will be for them to decide how to use the money saved.
The Minister of Finance Martin Helme explained the essence of the reform. “It is important to keep in mind that all people who are already contributing towards their second pillar pension and also wish to do so after the entry into force of the reform will need to do nothing. The same also goes for people who are currently not members of the second pillar pension scheme and do not wish to join it in the future; they will also need to do nothing. The general rule today that young people who enter the labour market join the second pillar scheme by default will also be maintained, but the reform will give them the right to reverse this rule, that is, not to join,” the Minister of Finance said.
In Helme’s words it must be kept in mind that if a person withdraws their money, their contributions to the second pillar will also stop automatically. Once a person leaves the second pillar scheme and either withdraws their money or does not, they will be able to restart contributing later if hey so wish. They will be able to do so after at least ten years will have passed since they opted out of the second pillar scheme. Thus a decision to leave is a weighty one and the people will have to think it through carefully. It will be possible to terminate contributions to the second pillar and to withdraw the money for up to two times. Once a person will have opted out of the second pillar scheme and then restarted contributing when ten years have passed, they will once more have an opportunity to change their mind and to opt out of the second pillar scheme. However, the person will be entitled to this if they will have been contributing to their second pillar fund for at least ten years. If they exercise their right to opt out of the second pillar scheme for a second time, they will not be able to opt back in after that.
“There will also be some restrictions that will have to be taken into account upon the payment of the money. It will be possible to withdraw only the total funds. If the amount accumulated does not exceed 10 000 euro, it will be paid as a single instalment. In the case of a larger amount, the remaining share will be received as one or two following instalments. Payments will be made in January, May and September. If a person begins to use their second pillar funds ahead of their retirement age, income tax of 20 per cent will have to be paid on it,” the Minister of Finance explained.
Helme noted that the reform might involve long-term revenue for the state budget from the termination of the contributions to a maximum extent of 400 million euro, and a one-off revenue from the withdrawal of the money to a maximum extent of one billion euro, that is, an increase in income tax and an increase in VAT. The reform will involve IT-developments in the Tax Board and the Social Insurance Board. The one-off cost is estimated at 7.1 million euro, and running costs will probably be added later which according to current estimation will be around a million euro per year.
The majority of the amendments made by the Bill will be implemented in 2021. For that, several IT-systems supporting the functioning of the second pillar scheme will need to be developed and other preparations will need to be made in 2020.
Many questions were asked of Helme to hear explanations on the impact related to the mandatory funded pension reform and the projections related thereto.
Chairman of the Finance Committee Aivar Kokk said that it would be possible to introduce amendments into the Bill in the course of the second reading.
During the debate, Maria Jufereva-Skuratovski (Centre Party), Andres Sutt (Reform Party), Siim Pohlak (Estonian Conservative People’s Party), Helir-Valdor Seeder (Isamaa)) and Indrek Saar (Social Democratic Party) took the floor and presented the positions of their factions on the planned reform.
The Estonian Reform Party Faction and the Social Democratic Party Faction moved that the Bill on Amendments to the Funded Pensions Act and Other Associated Acts (mandatory funded pension reform) (108 SE), initiated by the Government, be rejected at the first reading. The result of voting: 40 votes in favour and 53 against. The motion was not supported. The first reading was concluded and the deadline for submission of motions to amend is 16 December.
The sitting ended at 6.58 p.m.
Video recordings of the sittings of the Riigikogu can be viewed at https://www.youtube.com/riigikogu
(Please note that the recording will be uploaded with a delay.)
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