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- Since the beginning of the year, world stock markets and the prices of Tuleva’s World Stocks Pension Fund and Tuleva’s Third Pillar Pension Fund units have increased by 15%. Over the past five years, the price of a unit in Tuleva’s World Stocks Pension Fund has grown by an annual average of 8.3% (1).
- Monthly contributions, new savers, and market growth have collectively increased the assets of Tuleva’s pension funds by 155 million euros.
- The number of people leaving Tuleva’s funds continues to be significantly lower than average for Estonian second pillar pension funds.
- The Tuleva team is expanding, and we are actively seeking new talent.
World stock prices have surged since the start of the year
Our pension fund assets closely follow the world market index. Since the beginning of this year, world stock prices, including those of Tuleva’s World Stocks Pension Fund and Tuleva’s Third Pillar Pension Fund units, have increased by 15%.
While short-term performance, a few months or a few years, doesn’t offer insights into the long-term growth of our assets in Tuleva’s funds, historical global financial market data reveal certain patterns further supported by Estonian pension fund statistics.
- Low-cost index funds tend to outperform high-cost pension funds in the long run.
No actively managed pension fund in Estonia has outperformed the global market and index funds over the past five years. Estonia is not an exception in this regard. Globally, high-fee funds consistently underperform low-cost index funds. (2)
- Fluctuations bring good returns
Past performance does not reliably predict future performance. If the history of the markets has taught us anything, it is that stock prices go up and down. Sooner or later, we may all experience prolonged periods when the value of our account goes down for several months or even years. Why do we – and even the Swedish state, for that matter – think that a stock fund is a good choice for building your most important financial asset?
The answer is straightforward: there is no such thing as a risk-free return. On its website, the Swedish Pensions Agency goes as far as to state that fluctuation in asset prices is a prerequisite for earning returns. Compared to bonds, global stock markets have significantly bolstered investors’ wealth over the last century, surpassing inflation and aligning with economic growth. While past performance doesn’t necessarily predict future outcomes, it remains the most reliable indicator we have regarding future prospects (5).
Therefore, for savers, reducing risk typically means accepting a lower expected return. Most of us don’t earn enough to accumulate substantial capital for the future without the help of returns. Nevertheless, it’s crucial to remember not to invest money in a stock fund if you’ll need it in the next few years
Five-year decline in bond fund unit prices
The unit price of Tuleva’s World Bonds Pension Fund has fallen by an average of 1.7% per year over the past five years, totalling a loss of 8.9%. However, the unit price has rebounded by 0.8% since the start of this year.
Bond prices move inversely to their current yields. Five years ago, the current yield for global investment-grade bonds in euros stood at 0.8% annually, while it has risen to 3.5%, today. This is good news for those purchasing bonds now. Unfortunately, the value of bonds bought five years ago, as well as the unit value of our bond fund, has significantly declined.
Tuleva’s World Stocks Pension Fund is now 100% invested in equities
Following the last bond sale in March, our World Stocks Pension Fund is now 100% invested in stocks, fully mirroring the portfolio of Tuleva’s Third Pillar Pension Fund. Since the second half of 2019, legislation has allowed second pillar funds to allocate 100% of their assets to stocks, compared to the previous limit of 75%. We chose a gradual transition over three years and, by the beginning of this year, only about 5% of the fund’s assets remained in bonds. In March, we also exchanged this remaining portion for stocks.
Hindsight suggests the gradual approach might have been the wrong move: had we made the transition all at once in January 2020, the unit price of our fund would have increased by nearly 4% over three years. This is also the primary reason behind the difference in returns between our fund and the SEB index fund, despite the similarity in their portfolios.(3)
However, it is important to remember that investing is a long-term process subject to unpredictability. A wise approach to decision-making is to make changes incrementally, in small steps. This strategy minimises the risk of regrettable decisions requiring hasty reversals.
Assets are approaching 600 million euros
The number of people investing in index funds continues to grow steadily. July was particularly promising, with 16 million euros from new pension savers added to our second pillar funds by the end of the second exchange period. Tuleva’s World Stocks Pension Fund will likely rank among the three largest in Estonia in terms of assets by year-end.
While the size of our funds isn’t a goal in itself, larger asset volumes translate into better terms for Tuleva investors. Unlike banks, all our funds have very low fees, and an increased fund size can only further reduce these fees.
Our actual growth rate is affected by factors that are beyond our control. In the current year, state compensation to second pillar contributions and market growth have collectively boosted our assets by nearly 95 million euros. On the other hand, those who chose to exit – whether by transferring their assets to another pension fund or withdrawing from the second pillar altogether – reduced our assets by almost 15 million euros.
Tuleva’s growth engines: contributions from current and new second pillar savers
Our mission at Tuleva is to assist more and more individuals in building future capital by regularly setting aside small amounts. Thus, it’s vital that the primary driver of our growth remains increasing monthly contributions from our current pension savers.
In the past six months, our contributors have bolstered their pension accounts by more than 40 million euros. Notably, 50% of these contributions were directed to the third pillar, which has experienced a 20% upswing within the year. With third pillar contributions, people can significantly boost their savings rates.
Second pillar growth requires deliberate effort
We knew from the outset, when founding Tuleva, that the majority of Estonians’ financial wealth is concentrated in the second pillar. This serves as the cornerstone of achieving our mission: the true value of Tuleva lies in assisting people in effectively building their savings in the third pillar. To ensure the sustainability of our efforts, it’s important that individuals transfer their second pillar to us.
Our market share of second pillar assets currently stands at less than 9% – a fraction of its potential. However, individuals are unlikely to transfer to a new fund without a compelling reason. The long-term impact of fees on returns often eludes even those with solid financial knowledge. Presently, less than 20% of the second pillar’s total assets are held in index funds.
Over six years, we’ve learned that there’s no chart, website, or email that can act as a magic bullet and instantly persuade pension savers to switch to index funds. What truly drives change is purposeful efforts to eliminate obstacles: we minimise information overload, simplify the transfer, and provide guidance when people are ready to make informed choices. Having a friend or role model active within the Tuleva community, who can share all the relevant information, is better than any advertising campaign.
This is precisely what we strive to achieve through our product development, blog, emails, social media, customer support, and public appearances. In the early days, our team was tiny, consisting of just two full-time employees and a few assistants. This explains why our growth came at a remarkably low cost, while results fluctuated: with more time on our hands to invest, the results were outstanding; with less, they faltered.
Today, we have established a dedicated growth team, led by Erko in product development and Sten in operations. Our growth is now increasingly less reliant on my personal involvement, making it more sustainable. I’m confident that this approach will propel our growth rate to a consistently higher level.
We succeed when our savers reach their goal
We’ll reach 2.5 billion euros in assets once we have engaged 100,000 determined investors. These are individuals who have both their second and third pillar at Tuleva and contribute the maximum amount or, at the very least, 10% of their income to the third pillar. At this savings rate, these individuals stand a good chance of accumulating sufficient capital for retirement.
Currently, only 3,346 individuals are saving with such commitment. This represents just over 5% of all those who currently hold units in Tuleva’s pension funds – and this number has been slow to increase. This indicates that a significant majority of pension savers still lag far behind the savings commitment of a “determined” pension saver. How do we evaluate our progress in activating our savers?
There are two actions individuals can take to strengthen their commitment to savings:
Transfer your second pillar to Tuleva (or another index fund). Most individuals currently accumulate funds in their second pillar through high-fee bank funds, likely resulting in lower long-term returns compared to the global market. (2) Unfortunately, without substantial returns, it can be challenging to reach one’s desired accumulation goal.
Since the start of the year, 1,302 third pillar pension savers have also transferred their second pillar to us. This represents just over 6% of the full potential. The primary obstacle to transferring the second pillar seems to be hesitation, often expressed as the aversion to “putting all your eggs in one basket”. However, an index fund offers the most effective diversification, which is not improved by keeping money in another fund.
Contribute to the third pillar. In the first half of the year, 25,766 individuals made at least one payment to our third pillar fund, amounting to a total of 20 million euros and marking a 20% increase compared to the same period last year.
The most reliable path to achieving your savings goal is by setting up a standing order (also known as an automatic payment). By the way, you can now do this directly on our website, without having to navigate through online banking portals. Currently, almost 15,000 people have set up standing payment orders for Tuleva. Furthermore, if circumstances permit, consider increasing the amount of your standing order. Of those with standing orders, 13% have increased their amount in the first half of the year
New pension savers
The majority of Estonian residents have not yet heard of Tuleva or have yet to take that first step. However, this year, 3,482 new pension savers have joined our ranks. The influx of new savers often depends on the prominence of pension fund discussions in the public sphere. Our website and emails serve as valuable tools to help individuals navigate the information noise and make informed choices.
How do we reach new individuals when public discourse doesn’t revolve around pension reform? Remarkably, 80% of our new savers join us based on recommendations. When these recommendations come from respected figures in the financial industry, such as Kristi Saare or Indrek Seppo, it reinforces our belief that we are on the right path.
Even more frequently, however, recommendations come from friends, colleagues or relatives. The more people are willing to guide their social circle toward wise financial decisions, the sooner we can accomplish our mission.
Product development for a clear path
Our task is to ensure that anyone visiting the Tuleva website after a recommendation can navigate the website without running into any hurdles. We believe that 15 minutes should be enough time to launch a lifelong investment portfolio using the second and third pillars. In the first half of the year, 9% of new savers at Tuleva started by opening both a third and second pillar. We aim to increase this percentage significantly.
Low rate of leavers
Frequently switching between pension funds does not contribute to achieving better returns. In truth, it is more likely to have the opposite effect. We aim to maintain a churn rate below 3% of total assets. Currently, we have exceeded this threshold due to a somewhat higher number of second pillar withdrawals. Over the past 12 months, a total of 4.7% of assets have left the second pillar.
Tuleva’s financial performance is on track
An increase in asset volume leads to lower fees, provided we can control growth costs and reduce variable expenses. Throughout our six years of operation, we have successfully lowered fees for both fixed and variable costs, and we intend to continue this trend in the future.
While new hires initially increased our costs, our results over the past months have shown that this investment in growth is already paying off. Our income should cover our expenses and I believe this will remain the case in the second half of the year.
As always, the operating profit is supplemented by the revaluation of the pension fund units we own. In the first half of the year, this addition amounted to 0.6 million euros. It’s important to note that this is purely an accounting adjustment and doesn’t impact our economic activities
Two new team members
At the beginning of July, our new board member, Sten Andreas Ehrlich, began working with us. This brings the total number of board members to three. Sten is responsible for operations, while Erko Risthein, who joined the board in the spring, oversees product development and technology. Aside from being the third board member and chairman, I also handle investment strategy.
In August, our new office manager, Ketlin Veevo, joined our team. In addition to bettering the work environment, Ketlin also assists Pirje with customer support.
However, we still have an essential position to fill: the Head of Risk and Compliance. In the past, we have outsourced this role as a service. Given our significant growth, this approach has outlived its usefulness. However, regardless of this growth, the role does not currently require a full-time position. We have recently begun a public recruitment process, and we are optimistic about finding a qualified part-time professional by autumn. We welcome any recommendations or suggestions for potential candidates!
Next steps
In the second half of the year, our efforts will focus on activating our current pension savers, helping our savers overcome any hesitations in transferring their second pillar to Tuleva, and providing the right incentives to maximise contributions to the third pillar.
(1) All data on pension funds are from Pensionikeskus.ee as at 31 July 2023.
(2) See, for example, the S&P analysis here and the comparison of Estonian second pillar pension funds with index funds here.
(3) I am currently working on a blog post about the differences between index funds. The five stock index funds available to Estonian second pillar contributors also differ slightly in terms of portfolio composition principles, which can lead to differences in short-term performance.
(4) The chart compares Tuleva’s World Stocks Pension Fund, the LHV L Pension Fund, the Swedbank Generation 1970–79 Pension Fund, and the SEB Progressive Pension Fund. I conducted this analysis on 23 August 2023, a few days after my 50th birthday. I couldn’t find a recommendation for my age group on Luminor’s website. Interestingly, the recommendations of a bank tend to change drastically once you mention that you’re saving with Tuleva. Initially, they may suggest their high-fee fund, but once you mention Tuleva, they suddenly remember that they too can offer an index fund.
(5) My trusted source for the history of global financial markets is the data collected by Paul Marsh, Mike Staunton, and Elroy Dimson of the London Business School, published annually as the Global Investment Returns Yearbook. Unfortunately, Credit Suisse, which owned the rights to publish this book, ceased operations this year. I hope this valuable data will continue to be published by other entities in the future.
