Dear Tuleva pension savers and members,

If you have just one minute to read:

• In the first six months of the year, Tuleva pension savers contributed 53 million euros into the second and third pillars, which is a third more than in the same period last year. The number of people contributing to the third pillar increased by 25% compared to the previous year.
• Global stock markets rose by approximately 15% in the first half of 2024. We cannot predict the future performance of stock markets, but historically the best returns have been earned by investing regularly in diversified, low-cost index funds that hold shares in many global companies.
• Tuleva already has some 72,000 second or third pillar investors. The number of investors is gradually but steadily increasing.

Read more:

How low can fees go?

Low fees are one of the surest ways to increase the return on your pension assets. It makes perfect sense: the less you pay in fees to the fund manager, the more return you get. In Tuleva, pension savers can be sure that the more people there are who save together, the lower the fees will be.

We have to cover two types of costs from our fees. The rate of variable costs, such as the fees to the depositary bank, the guarantee fund fee and the registry fees paid to Pensionikeskus (the Pension Centre), is a fixed percentage of the assets in our funds.(1) With these fees, it’s simple: as soon as the rate is reduced, we can immediately reduce our fee. This is what we did at the end of last year, for example, when we managed to negotiate a lower fees that we pay to the depositary bank.

Fixed costs, such as salaries and costs related to office space, IT infrastructure, auditing, etc., need to be covered regardless of the size of our assets. A downturn in the market can quickly lead to a significant reduction in the value of the assets. On the other hand, if these costs are well under control, there is scope for a reduction in fees in the long term.

One thing you can be sure of when you save with Tuleva is that all our funds have low fees. In the second half of the year, together with the Supervisory Council, we’ll review the fees for our funds and decide whether we can reduce them further, given the rapid growth in assets.

The graph shows the average ongoing charges per fund manager, weighted by the volume of pension fund assets. Data as at 18 July 2024.

What most people can do immediately to reduce their fund fees is to simply move their second or third pillar assets from an old, high-fee bank fund to a low-fee index fund.

Growing share of index funds

As elsewhere in the world, the share of index funds is also on the rise in Estonia. Today, they already account for a quarter of the assets in the second pillar and for a third of the pension savers. Index funds are growing fast for two reasons. Firstly, for the fifth year in a row, young people entering the labour market are automatically allocated to an index fund with a high proportion of stocks. Secondly, every year a large number of people switch from a high-fee fund to an index fund.

This is a very positive trend. The popularity of index funds has forced all fund managers to include a low-fee index fund in their range, lowering the average fees of all fund managers.

As Tuleva pension savers, we can be proud to say that, thanks to all of us, Estonian pension savers have lower fees and more choice. At the same time, we still have a lot of work to do, as 75% of second pillar assets are still held in old, high-fee bank funds.

Strong growth in contributions

In the first six months of this year, those of us who save with Tuleva contributed 53 million euros to our second and third pillar accounts. This is one third more than in the same period last year.

In the first half of the year, more than 32,000 people made a contribution to our third pillar fund. This is 25% more than in the previous year. In addition, people who had already saved in our third pillar fund last year increased their contributions – by as much as 37% compared to the first six months of the last year.

The most reliable way to achieve your savings goal is to set up a standing order. At present, almost 19,000 people save automatically in our third pillar through a standing order. This is 30% more than a year earlier. If you also want to simplify the way you save, you can make a contribution to the third pillar here.

A new option to save even more tax-free is to increase the amount you contribute to the second pillar. Nearly 4,700 Tuleva pension savers have already increased their second pillar contribution to the maximum of 6% of gross salary. This is about one fifth of the total number of applications (around 38,000) made by people in Estonia to increase their contributions.

Interestingly, quite a significant proportion of those who have submitted the above application have their third pillar only in Tuleva, while their second pillar is elsewhere. You don’t even have to be a Tuleva pension saver to submit an application through our website. It’s easy and takes just a few minutes.

Another 760 people have raised their second pillar contribution to 4% in Tuleva. However, a large number of pension savers haven’t yet submitted an application. After all, the deadline is the end of November, and it’s only human to leave important things to the last minute. But it’s good to see that every time we send out a reminder email, more people submit the application. We’ll keep nudging you in the months ahead. (2)

The easiest way to save more: pay less in fees

We have more than 20,000 pension savers who contribute to our third pillar fund, while their second pillar savings are held elsewhere. Some of them are already saving in a low-fee index fund managed by a bank, but most are still paying into some old, high-fee pension funds. It would be very easy for them to increase their savings rate immediately: all they’d have to do is stop paying high fees to their current fund manager. For example, if you have accumulated 10,000 euros in your pension account, switching from a high-fee fund to a low-fee index fund will save you around 6 euros each month. If you have saved 20,000 euros, then you will save even more. This way you’ll increase your savings right away.

In the first half of the year, 1,182 of our third pillar savers took this simple step, withdrawing almost 12 million euros from high-fee funds. Together, they now save at least 10-12,000 euros more each month thanks to lower fees. Transferring your second pillar takes two minutes and costs nothing.

Stock markets continued to rise in the first half of the year

In the first six months of this year, global stock markets grew by 15% on average. The global market does not always move in a straight line upwards: just two years ago, for example, the year started with a similar decline. It’s not possible to predict the exact return on our assets over the long term. However, we can ensure that the returns on our assets are in line with the average returns on global equity markets.

By regularly investing a portion of our income each month in the shares of companies around the world, we are steadily increasing our stake in the drivers of the global economy. This has historically been the best way to ensure that our wealth grows in line with global growth and outpaces inflation. (3)

The graph shows the performance of the Tuleva World Stocks Pension Fund compared to the global stock market index (MSCI ACWI), the Estonian pension fund average (the Estonian Pension Index, EPI) and the inflation rate in Estonia. Sources: Pensionikeskus data as at 28 June 2024, MSCI and Eurostat.

Our third pillar fund is less than five years old. Like our second pillar stock fund, the Tuleva Third Pillar Pension Fund tracks the global stock market average.

The graph shows the performance of the Tuleva Third Pillar Pension Fund compared to the global stock market index (MSCI ACWI), the Estonian pension fund average (EPI) and the inflation rate in Estonia. Sources: Pensionikeskus data as at 28 June 2024, MSCI and Eurostat.

Global bond market returns and the returns of the Tuleva World Bonds Pension Fund were slightly negative in the first half of the year, as global bond yields rose somewhat compared to the beginning of the year. (4) Despite this small decline, a year and a half of higher interest income has slowly but steadily reduced the 15% decrease in the value of bonds in 2022. To date, the fall in the unit price of our bond fund has been reduced to 11% compared with early 2022. If interest rates remain at the same level, the interest income, after taxes and fund fees, will add 2-3% per year to the unit price of our fund.

The graph compares the performance of the Tuleva World Bonds Pension Fund with the performance of the global bond market index (50% Global Aggregate and 50% Euro Aggregate), the Estonian conservative pension fund average (Conservative Strategy Funds Index, EPI-10) and the inflation rate in Estonia. Sources: Pensionikeskus data as at 28 June 2024, Bloomberg and Eurostat.

Committed pension savers do not switch funds often

It’s important to make sure that you continue to save in both good times and bad. A committed saver won’t switch funds when a salesman in a shopping centre offers a deal, won’t stop contributing to the third pillar when the markets are falling and won’t withdraw from the second pillar before it’s time to retire. Life is full of temptations and it’s easy to find compelling reasons to stop saving. We are pleased that Tuleva’s pension savers are committed to securing their future financial well-being.

The graph shows the volume of second pillar assets transferred to other funds per fund manager as a percentage of the fund manager’s assets.

It’s no wonder, then, that our savers have more in their pension accounts than their peers. More information can be found in the comparison calculator (in Estonian).

A couple of months ago, we looked at the assets of our young (under 35) active savers and asked them whether their higher pension assets were simply due to higher wages or whether they had another secret trick. We found out that Tuleva’s savers also outperformed their peers with similar incomes, simply because they save more and their pension assets have earned higher returns.

Moderate but steady growth in new savers

Tuleva already has more than 70,000 second or third pillar investors, but most people in Estonia have never even heard of us. That’s why we continue to look for new ways to reach out to people whose friends are not yet saving in Tuleva. We also want to encourage those who have already shown interest to take the next step.

So far, we have used various platforms of Meta (especially Facebook) to distribute our blog posts for free or for a fee. Over the past year, we have also been experimenting with other channels to avoid becoming too dependent on one. For example, we signed an agreement with the business portal Delfi Ärileht to support its investor section Investeeri, launched an Instagram account and are trying out online advertising on the news portal Postimees. 

Every month, several hundred people take the first step: they either open their third pillar account with Tuleva, transfer their second pillar account to us or do both. Of course, we would like this number to be higher. After all, just under 6% of all second pillar investors in Estonia save with Tuleva. Despite the fact that one third of the total market has opted for the third pillar in Tuleva, the market for the third pillar itself is still in its infancy – just under one in six wage earners in Estonia made contributions into their third pillar last year.

However, we must be mindful that the cost of finding new customers is at our expense, as Tuleva pension savers. And it’s not good for people to make a decision they haven’t thought through properly because of advertising or aggressive sales tactics. That’s why our outreach is and will continue to be moderate. Satisfied savers are our best publicity. Indeed, it’s always good to hear that most of the new savers at Tuleva have joined us on the recommendation of a friend.

Very good financial results

A larger volume of assets also means more income for Tuleva. In the first six months, we earned nearly 1 million euros in management fees. After deducting variable costs, we had a gross margin of 0.8 million euros to cover our fixed costs. This is 66% more than in the first six months of the previous year.

In the first half of the year, our fixed costs increased due to salary costs, mainly in connection with the recruitment of new employees. We have managed with a very small team since the inception of Tuleva, but the growth in the number of pension savers and the volume of assets, as well as the increasing regulatory complexity of the financial sector, has also created the need for us to strengthen the team with full-time staff. Nevertheless, we remain a fund manager with the smallest team of 13 employees. As our income grew significantly faster than our expenses, we made a strong operating profit in the first half of the year.

As is always the case, the net profit is significantly affected by the revaluation of the Tuleva pension fund units that we own. This time, the increase in the unit price added a large proportion to the net profit, whereas sometimes a revaluation can reduce profits substantially. We don’t take into account changes in the price of fund units when assessing our performance. After all, since Tuleva’s inception, we have agreed with our members that our equity is invested in our pension fund units and that price movements are not under our control.

This report also excludes a portion of our operating expenses, which have historically been borne by the fund manager’s parent company, the commercial association Tulundusühistu Tuleva. It consists mainly of work contribution expense, where the association issues work contributions to acquire shares in the membership capital in return for work done for Tuleva. In the first half of the year, the association paid 46,640 euros towards these costs.

The table shows the main financial indicators for Tuleva Fondid AS.

Advocacy: the fine imposed by Finantsinspektsioon is still pending a court decision

At the end of last year, we were imposed a fine by Finantsinspektsioon (the Estonian financial supervision and crisis resolution authority) for a breach of the rules of information activities. Earlier this year, we decided to challenge the fine in court. At the time of writing this report, we have information that the court is expected to make a decision in September.

However, the legal dispute is only one part of the process of finding a solution to the problem. In the meantime, we have met with both Finantsinspektsioon and ministry representatives to discuss the issues of communicating about pension funds. We are still of the opinion that an honest discussion about pension funds should not be so complicated that it can only be held with the help of lawyers.

Improving pension payments

We accumulate assets in our pension accounts with the intention of using them one day. In the early days of Tuleva, we worked hard to get the state to remove unnecessary restrictions on the use of pension assets. Today, these restrictions have been lifted and almost 50,000 people in Estonia who have reached pre-retirement age in the last four years have been able to use their second pillar assets as they wish.

Deciding how to use pension assets is as important as deciding how to accumulate them, and a wide range of choices does not necessarily ensure the best outcome for the individual. Last year, savers of retirement age withdrew almost 70 million euros from their pension accounts as a lump sum, paying almost 7 million euros in income tax. In our view, this is an unnecessarily high cost for pension savers.

We’re pretty sure that most of the people didn’t take the money out to spend it immediately. They probably deposited the money in a bank or elsewhere, with plans to spend it in small amounts over many years. They took the money out all at once, instead of having a funded pension, just so that they could finally “hold it in their own hands”.

The challenge we face is how to help second and third pillar savers understand that they don’t have to transfer their pension assets to a bank account and pay income tax on them. After all, regular payments from the pension pillars are exempt from income tax. Over 19 years, a 65-year-old Estonian is likely to earn a fifth more or even twice as much from their pension pillars than they would by withdrawing it as a lump sum or even putting it in a bank deposit.

In June, we started developing a system for withdrawals from pension account and hope to release the first version to the public in the coming months. However, this is only the first stage of a longer process. If you or a member of your family, a colleague or an acquaintance is about to start drawing on their pension assets, please refer them to us. This is the quickest way to learn what is important for savers.

Happy saving!

Tõnu Pekk
Member of the Board of Tuleva Fondid AS and Fund Manager

You can find the Tuleva association, Tuleva Fondid AS, and Tuleva pension funds audited reports here.

(1) Because of the way pension funds are regulated, the management fees of our second pillar funds must cover both the deposit fee and the guarantee fund fee. In the third pillar, the deposit fee is paid directly from the fund and there is no guarantee fund fee. It makes no difference for the pension saver, however, as in both cases all costs are reflected in the fund’s total expense ratio. That’s why it’s always worth looking at a fund’s ongoing fees.

(2) In fact, you can also apply for an increase or a decrease in your contribution at any time after November. However, if you want your second pillar contribution to increase from the beginning of the next year, you’ll have to submit the application before the end of November. Applications submitted later will not take effect until early 2026.

(3) The view that long-term returns in global equity markets have consistently outperformed inflation is supported by the creators of one of the most comprehensive databases on equity markets today, Professor Dimson from Cambridge University, and Professor Marsh and Dr Staunton from London Business School. An annual summary of their database is available here.

(4) In other words, bonds are fixed-income securities whose price rises when interest rates fall and vice versa.

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.

Tuleva was fined for violating communication rules. The Financial Inspection, which imposed the fine, accused us of using two sentences in our July Facebook ads: “Keep the profitability of your pension assets” and “The only one with honest statistics.” Additionally, FI found that we had omitted mandatory disclaimers from some advertisements. (1)

FI considered the phrase “Preserve the productivity of your pension assets” as a promise that the returns in Tuleva are guaranteed. This was certainly not our intention. We communicate directly and straightforwardly about Tuleva, and if we had wanted to say that returns are guaranteed, we would have said so plainly. Since the beginning, we have emphasized that the surest way to achieve good returns is by keeping as much of the return on your assets for yourself, rather than paying fees to the bank. Instead of guaranteeing apparent returns, we emphasize that your returns are unlikely to move steadily upward.

However, understanding our texts occurs through the eyes of the reader, not the speaker. We need to test our texts and designs more effectively to avoid any misunderstandings.

FI found the advertisement “The only honest statistics” misleading. The issue was not the content of the advertisement – in my opinion, no other fund manager today shows the returns earned by individuals in their pension funds in a comprehensible way per annum basis. We were criticized for not providing a clear explanation in the advertisement for why it is considered “the only honest statistics.”

We need to continue working on the methodology for displaying returns. When Tuleva started, we were the only ones honestly discussing fees and including all costs in the fund’s fees. Others did not do this until the law and the Financial Inspection obligated them to do so. Similarly, we now need to achieve the same with displaying returns: ensuring that every saver first sees their personalized return on an annual basis, not some arbitrary period’s change in share price or a return figure that does not consider how many years a person has been saving.

Our goal is to improve pension savings in Estonia.

This goal is even enshrined in our articles of association: to contribute through communication activities so that saving becomes a simpler and more understandable activity for everyone in Estonia. But we do not operate in a vacuum. The financial sector constantly releases a large amount of information that hinders decision-making.

The extensive decision by the Financial Inspection is an important starting point for setting our activity goals. Over the next two weeks, I will systematically explain in a blog series the issues we are addressing with our communication, the rules we were deemed to have violated according to FI, what we can improve ourselves, and what regulations or practices need to be changed to truly make saving better and easier for people.

I am very grateful to many Tuleva members who have already offered their advice and support. If you have any questions, feel free to contact us at [email protected] or call us at 644 5100.

(1) You can find the Financial Inspection’s announcement regarding the decision here (in Estonian). The fine is the fund manager’s cost and does not affect savers in pension funds. We have grown so much by now that this substantial 100,000-euro fine does not hinder or slow down our operations. Nevertheless, we are considering appealing the decision and will decide in the coming weeks.

Tuleva investors will benefit from reduced fees once again! At Tuleva, we believe that the more investors join our ranks, the less everyone should pay in fees. This core principle drives our operations. Thanks to the remarkable growth in our assets, which have increased by 160 million euros since the beginning of the year, we are pleased to announce another round of fee reductions for our funds.

From 1 October, fees across all our funds have dropped by an additional 0.02 percentage points. As a result, the fees for the Tuleva Third Pillar Pension Fund now stand at just 0.33%.

For second pillar investors, the Tuleva World Stocks Pension Fund fees are 0.35%, and 0.39% in the Tuleva World Bonds Pension Fund.

For Tuleva members investing with us is even more advantageous than these fees suggest. A unique feature of Tuleva is that a portion of our fees are returned to our members. Each Tuleva member will receive 0.05% of the value of the assets accumulated in Tuleva’s second and third pillars as a membership bonus every year.

Tuleva stands out as the fund management company with the most competitive average fees in Estonia (1). The reason behind this is simple – we only offer good, low cost funds, while our competitors provide a mix of high-fee funds alongside more affordable options.

Tuleva stands out as the fund management company with the most competitive average fees in Estonia (1). The reason behind this is simple – we only offer good, low cost funds, while our competitors provide a mix of high-fee funds alongside more affordable options.

It is crucial to note that our fees are continuously decreasing at Tuleva. The current fees for pension funds in Estonia are unfortunately on the rise. The most significant impact can be seen in the fees of the two largest second pillar funds. Over the past two years, fees for LHV L have surged from 1.14% to 1.95%, while fees for the Swedbank 1970-79 Fund have increased from 0.65% to 0.77%.

Why do fees matter so much?

A simple rule applies when it comes to investment funds: the less you pay in fees, the more you retain from the returns generated by your assets (1). This is why reducing fees is the most effective way to improve your return on investment. While the fees for pension funds may appear small as percentages, higher fees can significantly erode your savings over time – find out how. 

Use our fee calculator to compare second pillar funds in Estonia.

Why are we lowering our fees now?

At Tuleva, our approach is straightforward – the more investors we attract, the lower the investment costs for all members. We review our fees regularly.

While the volumes managed by banks’ fund management divisions have declined due to people exiting the second pillar, Tuleva continues to experience robust growth. Our funds now exceed 550 million euros in total, with over 65,000 people already investing in Tuleva’s second and third pillars.

The timing of this reduction in costs is primarily due to lower custodial fees. Pension funds are required to entrust their assets to a custodian bank that holds the fund’s securities and executes transactions on its behalf. This ensures that investors’ assets are consistently kept separate from those of the fund management company. Deposits flow directly to the custodian bank and, from there, to the global securities markets. While this practice safeguards assets, it also involves fees charged by custodian banks. Thanks to our significant growth, we’ve been able to negotiate a reduction in these fees with our custodian bank.We are actively pursuing further fee reductions. There’s no need for external pressure from the state or competitors to prompt Tuleva to lower its fees. What motivates us is that Tuleva’s owners are the same people who grow their assets in our pension funds. Keeping costs under control benefits our members and assures other Tuleva customers that investing in our funds will become even more economical

What sets Tuleva apart?

Tuleva operates with a distinct mission: to help people build their future wealth with confidence. This is achieved by regularly setting aside funds and steadily growing their stake in the world’s largest companies. To fulfil this mission, we adhere to several fundamental principles:

Only good funds. At Tuleva, we do not hide good options among the bad ones. It is great that, following Tuleva’s lead, banks have begun to introduce index funds with lower fees to their product range. Unfortunately, these banks still have a vested interest in keeping the majority of their customers in high-fee legacy funds. At Tuleva, no customer pays more than 0.39% in fees.

For example, our largest fund, Tuleva World Stocks Pension Fund, charges a mere 0.35% in fees. By way of comparison, Estonia’s largest pension fund, LHV L, imposes fees of 1.95%, nearly five times higher.

Growth is important. We understand that the more significant our fund volume becomes, the lower the costs are for all our investors.

During our first years of operation, we learned that it is not enough to merely introduce good funds to Estonia. To ensure that more and more investors discover modern, low-fee index funds, we must help cut through the information noise and advertising clutter. As more people save wisely and consistently with our assistance, Estonia benefits as a whole.

Low fees. As previously mentioned, the cost of investing with Tuleva continues to decrease. While this does not imply that you cannot find funds with lower fees elsewhere, Tuleva believes in maintaining fairness by not subsidising the costs of smaller funds at the expense of other clients for marketing purposes.

Why do we personally invest with Tuleva, and why do we recommend it to our loved ones? By choosing to save with us, you can be confident that your funds are among the most affordable in Estonia and have the assurance that fees will continue to decrease in the future. Your returns will closely track global economic growth, and you can rest assured that Tuleva employees will never seek to sell our customers poor and costly investment products.

What can you do today to benefit more from your pension pillars? 

• Review your pension funds and make sure you are investing in both the second and third pillars with a low-fee index fund, maintaining annual fees of less than 0.5%. As a member, you will earn a membership bonus on your pension pillars with Tuleva.
• Check your third pillar contributions before the end of the year. If they are below 15% of your annual gross income (and also less than 6,000 euros), consider investing more to take full advantage of the tax incentive and receive a higher income tax refund in the spring.

By taking these steps, you will have a very good chance of accumulating substantial wealth for your future through your second and third pillars. 

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1. Ministry of Finance pension statistics review 2022, https://www.pensionikeskus.ee/statistika/ii-sammas/rahandusministeeriumi-statistika/

If you have just a 1 minute to read:

• 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.

1. 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)

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.