I have a good feeling as I’m writing this report. 2020 was a great year for us. It seems to me that all our previous years’ work has really borne fruit last year, thanks to some supportive external events.
Most people save less than they would like. Tuleva connects with people who want to improve their saving behaviour. Together, we will find ways to overcome the obstacles and start saving today. Our pension fund expenses are 50% to three times lower than those of banks’ larger pension funds. This ensures that the income earned by the savings goes to us and not the intermediary (1).
In 2018 and 2019, we had 3,000 and 8,000 new pension savers, respectively. While in 2020, as many as 34,000 people joined Tuleva to start saving with us. This means that 51,662 people are now saving in our second and third pillar pension funds. It’s particularly gratifying that most of the newcomers joined the voluntary third pillar. I believe these are the first voluntary long-term savings for most of them.
Business plan and fees
When I drafted a business plan for Tuleva five years ago, I added a note to the model that a first reduction in fees might be considered in 2022. In fact, when first launching the funds in March 2017, we already used lower fees than envisaged in the business plan. By now, our pension funds have reached 250 million euros, and I am very pleased that our supervisory board has decided to reduce fees.
Why is reducing fees so important when our funds already have the lowest management fees? There is a simple principle behind this – if at least one lower-paid index fund were available to our members, it would make sense for all of us to transfer our assets there and close our fund. There is no point in paying a higher price for the same product.
Real life doesn’t always offer us such clear choices. Following the example of Tuleva, banks have also included low-fee index funds in their product range. And the theoretical range of low-cost options will likely increase when using the pension investment accounts (see the section on pension reform below). Unfortunately, the bank’s website or sales rep will not direct you to a low-fee index fund but an old, actively managed high-fee fund.
Therefore, the inclusion of the first lower-priced fund in the selection does not mean we will recommend our members transfer their savings there immediately. Nor does it mean that we should reduce our fees to a level where we start losing money as the fund manager. However, when making plans, we always keep in mind that our common goal is to provide the best saving opportunities for all of us. The best opportunity might not necessarily be provided by a fund managed by ourselves.
Investing and the environment
I believe that now that we have a larger number of knowledgeable savers, it’s time to start tackling more complex issues. For example, how our pension money affects the world’s climate problems and whether our money is invested in ethically operating companies. It’s easy to point the finger at someone and blame banks or large corporations, forgetting that we, as unit-holders in pension funds, are all indirect co-owners of these companies.
The social and environmental impacts of investing, and a responsible consideration for these, are complex and often controversial issues. It’s even more difficult to reach a consensus together on what principles we should follow in our own funds. It would certainly be easier to offer a range of products and label one of them ‘green’ or ‘sustainable’ and leave the choice to each client.
However, this leads to a semantic contradiction: if one of our funds is ‘sustainable’, then by implication, the rest should be unsustainable. After all, we started Tuleva to tackle the problems together that each of us could not tackle on our own. We are also doing our best to reduce the carbon footprint of our joint investments and improve the social impacts.
We approached the sustainability issue in 2020 the same way we approached the fund management fees in 2017: we tried to assess the current carbon footprint of our pension funds unambiguously and compare it to other pension funds and the global average.
One of the most common indicators for assessing the carbon footprint of an investment is the weighted average emission intensity of the companies in the investment portfolio. As of the end of 2020, the weighted average carbon footprint of the companies in the portfolio of the Tuleva World Stocks Pension Fund and Tuleva III Pillar Pension Fund was 156 tonnes of carbon dioxide per USD 1 million sales turnover. The figure for the companies in the Tuleva World Bonds Pension Fund portfolio was 100 tonnes. As our portfolio closely follows the global average, our carbon footprint is also exactly equal to the weighted average of global listed companies (2).
This figure has fallen significantly since the launch of Tuleva pension funds four years ago. Why? Many oil producers and other Old World polluters have disappeared from among the world’s largest listed companies (and from the largest investments in our fund’s portfolio). They have been replaced by electric car manufacturers, renewable energy companies and others. The investment world is moving towards more environmentally conscious investments, and we are automatically moving with it – that’s what passive investing means.
Other pension funds are not disclosing their carbon footprint yet. According to my calculations, Tuleva pension funds have an even smaller carbon footprint than, for example, LHV’s Green Pension Fund or Estonia’s largest pension fund, Swedbank’s K60 (3). I very much hope that measuring the carbon footprint will soon become the norm in pension funds and that the requirement for disclosure will become statutory. The same way it has already happened with the total expense ratio of funds.
Clear and comparable data is the first step in deciding how to contribute to solving, or at least not exacerbate, global climate problems through our investments. It would be a good idea to base a decision on facts and not on a progressive-sounding fund name or a vague responsible investment policy document published on the management company’s website.
When summing up 2020, we should definitely talk about the pension reform, which was on the agenda of both the Riigikogu and the Supreme Court.
Here is a short summary of the pension reform:
- When you reach retirement age, you no longer have to give the assets in your second pillar account to an insurance company, but you can decide for yourself how to use these assets. According to the new law, this right arises in the early-retirement age (five years before the official retirement age). Remember that you have no obligation to withdraw money at the earliest opportunity; neither is there any tax advantage in doing so. You can do it at any time, starting from the early-retirement age, under the same conditions.
- In the future, you can save in the second pillar also through an investment account by purchasing yourself stocks or investment funds.
- You can leave the second pillar at any time and withdraw the accumulated funds.
Although the last point in the pension reform was the most discussed and controversial, the first one is the most important. We have been fighting for several years for the free use of money during retirement and have submitted proposals with thousands of signatures to the Riigikogu. This change (which, incidentally, was eventually agreed to by all the major political parties) increases the freedom of choice and brings great financial benefits to all investors – insurance contract costs and fees have consumed an estimated one-fifth to one-third of people’s pension assets until now.
What should you do in the context of the pension reform? Tuleva clients need not do anything. After all, we already reformed our pension pillar a few years ago and created a pension fund where it is wise to save regardless of whether saving is compulsory or voluntary.
The government transfers a portion of the social tax to the second pension pillar every month. Therefore, this is the best method of saving available to us. I was quite puzzled by the discussion about which was better – the first or the second pillar. The money in a second pillar pension account is a real asset to the saver (as also confirmed by the Supreme Court), which they can withdraw at any time. This is surely better than a promise, contained somewhere in the government`s first pillar pension accounts, that you will receive a few more euros of first pillar pension sometime in the future.
The only people who should act in light of the pension reform are those who already have a pension contract with an insurance company to receive second pillar payments. Such contracts can be cancelled until 31 March, in which case the balance of the contract will be paid.
Of course, the pension reform may also affect the financial results of our joint business – the Tuleva fund management company. Although continuing to save is the most sensible step for most of us, I cannot say today how many of the savers in our funds will decide to leave the second pillar. We will keep an eye on the developments this year and, if necessary, adjust our business plan.
Before we discuss future plans, let’s summarise what we have achieved in the first five years of operation.
We started from the second pillar because most of the working people in Estonia save money in the second pillar, and most of their financial assets are in the accounts of that pillar. At the same time, second pillar savers used to be able to only choose from among some of the worst-performing pension funds in the world.
Our achievements to date
- Every second pillar saver can now choose a good, low-cost index fund.
- Following Tuleva’s example, LHV, SEB and Swedbank have also introduced an index fund with a reasonable fee.
- The government no longer directs young peoples’ pension contributions to bond funds whose fees exceed real yields. At the beginning of their working careers, people who haven’t chosen a pension fund for themselves are now directed to a low-cost index fund.
- The Riigikogu finally decided to remove detrimental restrictions on using second pillar assets in retirement.
These are not trifles. Thanks to these, most Estonians can be expected to benefit two to three times more than before from every euro saved in the second pillar.
This is not the limit for Tuleva. We can make our pension funds even better. We can continue to work to ensure that Estonian laws protect people’s interests even better. We can help our members save more money in a smarter way – if your second pillar is sorted out, it is wise to start investing in the third pillar.
By choosing a low-cost second pillar fund, the average investor will easily save more than 10,000 euros in fees over their lifetime (4). But the second pillar alone is not enough to live well in the future. We save only 6% of our salary in the second pillar. For example, Finns and Swedes set aside at least one-fifth of their wages.
Only every tenth working person currently invests in the third pillar, saving on average just 3% of their wages. There are 100,000 third pillar savers in Estonia, and we save less than 100 million euros a year. If we saved like the Finns, we would have 600,000 savers and 2 billion euros a year.
In 2019, we launched a third pillar pension fund with the lowest fees in Estonia. A typical investor saves 10% of their salary in our third pillar (5). This rate could go up. In addition, tens of thousands of new savers joined our fund in November and December, and they too must be helped to achieve at least an equivalent saving habit and pace.
Now about our specific goal. In 2021, the volume of our third pillar fund should double (to 60 million euros). We should continue to add enough new savers to the second pillar with each changeover period, so that by January 2022 our funds would reach 300–350 million euros.
Tuleva’s important additional goals:
- We will continue to build a dynamic team at Tuleva. In addition to three full-time and one part-time employee, our team includes top experts involved in various projects: developers, designers, lawyers and others. An office manager and a part-time compliance officer will join us in January. We only hire highly qualified people, we pay them a good salary and provide a flexible and learning-friendly work environment. We create and implement a system for more efficient organisation of the distributed team’s work and for taking on new team members.
- We continue to automate operations and make them more efficient and risk-proof. We find at least one way to further optimise our work processes every quarter.
- I wrote more about Tuleva’s ecological footprint above. In 2021, we will map Tuleva’s opportunities and challenges in implementing a responsible investment policy and make relevant proposals to the supervisory board.
- We will continue to raise awareness to help people overcome one of the most important obstacles to the consistent implementation of a smart investment plan: information noise in the financial sector driven by competing sales tactics. We analyse the efficiency of our communication work and optimise the processes of customer support, member communication and other communication activities.
- As the only organisation representing pension investors in Estonia, we will continue to work to improve the laws governing pension investments. In 2021, we are aiming to eliminate double taxation on third pillar contributions exceeding the set limit. We will naturally continue to protect savers’ interests in the ongoing pension reform.
We are doing this so our members will have excellent opportunities for long-term savings in the future. We also consider the possibility that events beyond our control (whether political developments related to the second pillar or, for example, Vanguard’s entry into the Estonian market with super-low-cost pension funds) may make our own fund management unnecessary or economically meaningless for our members. These scenarios will not damage the assets of Tuleva pension savers. We have mapped these to help members and our other savers find the best choices even if the mentioned scenarios come true.
There is one thing we will not do in 2021. Together with the third pillar fund, we planned to develop an additional saving product for those whose third pillar is already full or who earn income as entrepreneurs. We will not offer such a product in the coming years, because Vanguard’s broad-based exchange-traded index fund (ETF) with an expense ratio of less than 0.5% is already available in the market through LHV’s Growth Account and Swedbank. The only way we could offer a similar product would be launching a new fund and obtaining a UCITS management company license. We certainly won’t be able to offer such a product at a substantially lower cost.
(1) The total expenses of all pension funds can be easily compared on the Estonian Pensionikeskus website.
(2) I used the BlackRock sub-funds end of November reports to assess the footprint of our portfolio.
(3) I chose these two funds for comparison because their management companies have presented these as funds with a very environment-friendly portfolio. You can see my calculations here.
(4) View and calculate using the calculator on our home page.
(5) The calculation is based on investors who have saved in the fund for at least six months.