Dear Tuleva members and investors,
If you have 90 seconds:
The formula for successful saving is simple: start early, save as much as possible, and ensure your assets generate decent returns. We, Tuleva savers, made significant progress last year:
- We set aside 102 million euros for the future
Together, we made contributions to our second and third pillars totaling this amount. More than half of it went into our third pillar fund, and our savers will now receive nearly 12 million euros in tax refunds from the state this spring. - Our returns are not far behind the global market average
Over the last five years, the unit price of the Tuleva World Stocks Pension Fund has grown by an average of 10.6% per year. We don’t pretend to predict the future and forecast what returns will be over the next 5 or 10 years. However, we know that the surest way to achieve good results is through low-cost investments in index funds. - The more people save together, the lower the fees become
The size of Tuleva pension funds has already reached 700 million euros, with 70 thousand savers. Thus, last year, we were able to reduce fees by another 0.02 percentage points.
This year, it’s even easier to save more. You simply need to submit a request to increase your second pillar contributions. It takes 2 minutes and for most people, it doesn’t even reduce net wages.
In more detail:
When we founded Tuleva, we made some critical decisions. We wanted to offer our savers funds with low fees because low fees are the only proven way to increase long-term returns. We also wanted the low fees at Tuleva to reflect our low operating costs – they’re not just lower because we’re making up the difference with a more expensive product (1).
The investment business is a business of scale. By keeping costs under control, we can reduce fees as the volumes increase. And because we’ve increased our volumes – a trend we continued last year – we’ve been able to lower our fees consistently, too. Now, the savers in our pension funds pay an average of two to five times less than those in the banks’ managed funds.
It’s worth reiterating why we place so much emphasis on fees. Shouldn’t returns be the primary focus? No doubt, returns are number one. But while fund managers often imply that higher fees lead to better returns, the numbers tell a different story: the less you pay in fees, the better your chance of a good return (2).
Growth is the best measure for achieving our mission
Our mission is to help as many Estonians as possible accumulate sufficient capital to live life to the fullest in their later years. This makes increasing the volume of our assets doubly important. First, growth helps to lower fees. Second, the assets in our funds mainly come from our savers, and our growth mostly stems from their contributions. Therefore, the more assets in Tuleva funds, the more capital our savers accumulate. With this in mind, we’ve set the goal of increasing our assets to 2.5 billion euros by the end of 2027.
Our funds’ assets are currently growing at a rate of 40% per year. What does this mean? Last year, our savers made 102 million euros in regular contributions to the second and third pillars (83 million in 2022) and redirected 71 million euros from other funds (38 million in 2022). That makes for a total of 173 million euros or 40% of our assets at the beginning of 2023 – to reach our goal, we need to keep our annual growth rate above 35%.
To achieve growth, you need to invest
The financial world is complex and full of noise, making it easy for people to get overwhelmed and put off making important investment decisions – such as choosing a pension fund.
When we started Tuleva, we quickly realized how important it is to talk about saving in a clear and straightforward manner, and so made this a principle in our articles of association. By providing information that’s easy to understand, we aim to make pension savings a transparent and common practice for all Estonians.
Over the years, we’ve invested significant time in our mission. We publish blog posts, write and appear in the media and campaign on social media. And these efforts aren’t just for show: the more energy we put into them, the faster our growth.
Market growth and state compensation boosted our assets
Contributions from our savers and redirected assets are not the only factors that influence the volume of our assets. Last year, for example, January’s state compensation boosted our second pillar assets by 25 million euros, while the growth of the world market (and consequently, the unit price of our funds) contributed an additional 92 million euros. However, as these elements are beyond our control, we don’t factor them into our growth rate metric. A year earlier, the same factors negatively impacted growth, with market decline reducing the volume of our assets by 57 million euros.
Very few people choose to leave Tuleva funds
In the past year, our assets decreased by 14 million euros (12 million euros in 2022) due to people withdrawing from the second or third pillar. In addition, investors transferred more than 12 million euros (9 million euros in 2022) to other pension funds.
Some people have questioned why we don’t include withdrawn or redirected assets in our growth rate calculation. Wouldn’t it be more accurate to look at the incoming money on a net basis, deducting outgoing money from the incoming one? Not in my opinion – and there are a couple of reasons for thinking this:
One, pension pillar funds are meant to be used. Some people start using them at retirement age, some earlier. But while opinions may differ on withdrawing from the second pillar before retirement age, our success isn’t measured by how little people use their savings.
Two, if investors leave to go to other funds (or “churn”), that’s a valuable indicator of quality, which shouldn’t be mixed up with other metrics. In my view, there’s no reason for an investor to transfer their second or third pillar to another pension fund – but if they do, that tells us that they are dissatisfied and that we’ve made mistakes somewhere in our onboarding process.
Our funds grow as the global market grows
Global markets performed well in 2023. The MSCI ACWI index increasing by 18% measured in euros – significantly up on the index’s average rate of annual growth of 12.5% over the last five years. The unit prices of Tuleva World Stocks Pension Fund and Tuleva Third Pillar Pension Fund increased by 19% over the year, while the five-year growth of our second pillar fund has been 10.6% per year. With the sale of the last bonds from the fund at the beginning of 2023, any lag behind the world market should now be equivalent to our fees.
While Tuleva Third Pillar Pension Fund has been operational for less than five years, it outperforms our second pillar fund by 0.7% per year based on the three-year average return. This is because the terms of the fund allowed us to switch to the maximum allocation of shares earlier.
Over the past five years, stock markets in developing countries have lagged behind those of developed countries. The MSCI Emerging Markets index has returned an average of 4.4% per year, while the developed countries index, MSCI World, has returned 13.6% per year. This has led to varying returns from Estonian index funds. The Swedbank 1990–99 index fund, which invests in developed countries, has performed the best, while the SEB index fund, tracking the world market as a whole, and Tuleva, comprising slightly over 10% shares of developing countries, have performed averagely. The LHV index fund, which invests significantly more in developing countries than the other funds, has fared the worst (3).
Does this mean that savers now need to carefully choose between index funds? I don’t think so. Anyone who invests in index funds has already made a wise choice and – thanks to lower fees – they have a great chance of achieving good long-term returns. Of course, I would prefer that everyone choose a Tuleva fund, but the banks’ index funds are perfectly respectable choices, too.
High interest rates mitigated bond investors’ losses
Few people have been unaffected by the rapid rise in interest rates over the past two years. While the increase in interest rates in 2022 certainly led to a challenging year for global bond markets, with the prices of previously low-yielding bonds falling, last year’s high interest rates resulted in bond investors earning higher interest income.
Last year, world bonds yielded a 4.6% return measured in euros. Nonetheless, the five-year average return on bonds remains negative, averaging -0.3% per year. The unit price of Tuleva World Bonds Pension Fund increased by 5.1% year-to-date, and the five-year return has been -1.2% annually.
ESG screening has not impacted performance
The past year was the first full year in which we applied ESG (Environmental, Social and Governance) screening to our investment portfolio. Back in 2021, we decided that our funds’ share portfolios can no longer include companies that don’t meet the essential criteria for sustainability. To make this change, we use leading BlackRock index funds that employ the ESG screen, excluding about 200 of the world’s 3,000 largest companies (about 5–6% of the market value).
We made a firm commitment that implementing our sustainability policy should not increase the current fees of our funds or alter our goal of achieving the average stock market return. Experience has shown that seemingly progressive or green financial products often serve as an excuse to charge higher fees, leading to poorer returns.
We continue to use the MSCI ACWI, which includes all the world’s largest listed companies, as the benchmark index for our funds. While the return of the portfolio applying the ESG screen was slightly (ca 1.5%) better than the regular return last year, the five-year average return differs only by a decimal point (+0.4% per year in favour of the portfolio with the ESG screen).
Our aim is to have determined savers
Today, most people in Estonia are saving too little money for their old age. In our estimation, fewer than 5,000 out of 70,000 Tuleva investors are saving enough. And when we look at Estonia as a whole, the picture is even less encouraging: only 100,000 people contribute to the third pillar, with an average contribution of less than 5% of their salary.
Our goal, then, is not just to increase the number of investors but to create more determined savers. A determined saver contributes to the second pillar and also saves at least 10% of their salary, or a maximum 6,000 euros per year, in our third pillar. In other words, determined savers are people who save 15% or more of their income.
While most pension savers have a long way to go before achieving an appropriate savings rate, we made progress in the past year:
- The number of savers in both pillars increased by 3,270 people to 19,851.
- Contributions to the third pillar increased by 28%, including payments by “old savers” (those who also made contributions in 2022) by 27%.Our benchmark for defining a determined saver is deliberately simplified. After all, everyone has their own idea of how much income they’ll need during retirement and how much they have saved.
Our benchmark for defining a determined saver is deliberately simplified. After all, everyone has their own idea of how much income they’ll need during retirement and how much they have saved.
It is easy to make a big leap in savings this year
2024 offers an excellent opportunity to take leaps in increasing your savings rate. You can now apply to allocate up to 6% of your gross salary to the second pillar from next year, compared to the current 2%. This is a tax-exempt contribution, automatically deducted from your net salary before income tax is applied.
What makes this an even more appealing decision is the income tax reform. For most people, this adjustment is not expected to reduce their net pay. And although income tax is set to rise from 1 January 2025, the tax-free minimum will also increase, along with the net salary for most wage earners. What could make more sense than directing this gain to the second pillar with just one click? Try out the calculations yourself.
One can now start saving in Tuleva Third Pillar through Coop Pank
After two years of negotiations, we’ve successfully begun collaborating with the Coop Pank team. Last autumn, we initiated the partnership, and just before Christmas, we went live. Now, in addition to starting a fixed-term deposit, Coop Pank clients can easily start saving in Tuleva Third Pillar through the savings menu in their bank’s mobile app, where they can jump over to our app to finalise their application with just a few clicks.
An unexpected expense affected our financial results
Our consolidated net earnings last year were 846,013 euros (in 2022, we made a loss of 771,632 euros). There are two parts to Tuleva’s financial results. The first is that our equity capital, which is largely invested in our pension funds, particularly the Tuleva World Stocks Pension Fund, earns global market returns. Last year, the value of fund units owned by Tuleva increased by nearly one million euros (in 2022, the value decreased by 0.8 million). Since Tuleva was founded, the value of fund units owned by Tuleva has increased by 2.1 million euros.
The second part is the operating earnings that Tuleva earns from managing the assets of our pension funds. We would have been very satisfied if we had finished the year at zero. Over the last two years, we’ve invested a lot in growing and strengthening the organization. We’re enhancing the product, expanding outreach efforts and using new channels to reach people – not to mention how we are making our back office more efficient and risk-proof.
Most of the results of last year’s work will translate into additional income this year, but the costs related to this work were already paid out as salaries or fees under service contracts, directly contributing to operating expenses last year. Only a fraction of these costs (totaling 75,000 euros in 2023) has been capitalized – mainly costs related to software development. We’ll be very pleased if, during this period of rapid growth, our expenses do not exceed our revenues, allowing us to break even. After all, these expenses will bring additional income for years and decades to come.
Unfortunately, the past year did bring one unexpected additional expense: the Estonian Financial Supervisory Authority fined us 100,000 euros for violating the advertising rules in our Meta campaign in July. While we’ve improved our operations to make sure there are no similar mistakes in the future, we believe the fine is disproportionate to the violation and are appealing the decision. Naturally, our aim is to reduce the fine, but we also hope to help bring more clarity to the field of pension fund marketing overall.
Of course, until the judgment is rendered, it is only right to fully reflect the received fine in the costs. But this is a fund manager’s expense and does not affect savers in our pension funds. Nor does it impact our growth, and we’ve already achieved a large business volume that enables us to cover the additional costs incurred at the expense of increased revenues.
It’s a good feeling to work at Tuleva. Our interests align with our savers’ interests, and we’re moving towards the same goal – securing a better future by setting aside some money every month without unnecessary effort. Although much work remains, I am pleased that together we have laid the foundation for a venture with both the will and the means to achieve this goal.
Wishing you all the best in your saving.
(1) For clarity: by “we”, I always mean Tuleva members and Tuleva Tulundusühistu and Tuleva Fondid AS jointly owned by us.
(2) A great deal of research has been conducted on the relationship between fees and returns. Most researchers have concluded that high fees inevitably lead to lower returns, as fund managers have no consistent ability to outperform the market average. Last year, for example, Triinu Tapver, who researched funds in our region (Central and Eastern Europe), received a research award from Eesti Pank (in Estonian).
(3) All world market index data is sourced from the MSCI website. MSCI updates the data sheets of its key indices every month. It is best to search for “MSCI ACWI net eur”, which will return a pdf file with the results of the MSCI ACWI, MSCI Emerging Markets and MSCI World indices over the last ten years. The best way to see the comparison between ESG Screened indices and the regular index is to search for “MSCI ACWI ESG Screened”.
We use a portfolio of two broad-based indices as a reference index for the global bond market: 50% is Bloomberg Barclays Global Aggregate and 50% is Bloomberg Barclays Euro Aggregate.
