Frequently asked question: We are looking at the performance of our pension accounts with a friend. Why are our Estonian average and world average returns different?
Money-weighted rate of return means you can see how much your personal assets have earned on average per year. You can also see how much the average investor would have earned by saving at exactly the same pace.
In other words, we download the amounts and dates of purchases of units made from your pension account. Then we calculate how much you would have earned if you had purchased the EPI index or the world market index for the same amount on the same dates. Because your friend probably started saving at a different time and/or their wages have grown faster or slower, their benchmark portfolio would buy both the EPI index and the world market index at a different price. Hence the difference in returns.
Another frequently asked question: Why can’t I see the third pillar returns?
We calculate returns using the IRR method, i.e. on an annualized basis. The problem with this formula is that if most of the contributions were made less than a year ago, it does not work well because it tries to convert a short-time change into an annual change.
Most of our third-pillar investors have made their contributions less than a year ago, so we don’t currently calculate third-pillar personal returns, as most investors would, unfortunately, get an inaccurate answer. You can see the return of the third pillar in euros under the “Aggregate balance of your pension assets”. If you divide the income by the total amount of contributions, you get an estimate of the current return.
Important information about the return on your pension assets
Rate of return: The rate of return on your pension assets depends on two things: the fund in which your money is and the time when you bought or sold units in that fund. Therefore, the rate of return on your retirement assets often differs significantly from the return your fund demonstrates on its website for the past year or years.
Our displayed rate of return is expressed on an annual basis, showing how much each euro you invested has grown on average per year. It is, therefore, different from the amount of profit (loss) you see from your online bank. The profit percentage shown by banks does not take into account how many years ago you invested your money.
You can select a time period for which you want to calculate the average annual return. By default, we calculate returns for the past three years.
Calculation: We calculate the rate of return on your pension assets using the internal rate of return (IRR) method. It takes into account each amount received in your pension account and how long that amount has been invested.
Comparison with the Estonian average and world market index: We also calculate what the rate of return on your pension assets would have been if the receipts in your pension account had been invested in the units of the EPI index, showing the average return of Estonian pension funds, or an index tracking the average return on the world market, on exactly the same dates.
We use the Morningstar Global Markets Index as the world market index. This index consists of shares of the world’s 7,000 largest listed companies and is very close in content to the MSCI ACWI index (used by our pension funds and also the Swedbank and SEB index funds in compiling the portfolio) or the FTSE All World index (used, for example, by the Vanguard global equity index fund VWRL). We use the Morningstar Index in this comparison because it is the only one available for free.
Until 31 December 2019, we used a slightly different benchmark index because, at that time, the law still prohibited pension funds from investing more than 75% of their money in shares. Therefore, we compare returns to an index of 70% global equities and 30% European government bonds for periods before that date.
Variants: You can compare your returns to a specific second pillar pension fund instead of the Estonian average. You can currently compare to pension funds that have been active since the launch of the second pension pillar.
You can also compare your returns to inflation. For example, if your return has been 4% per year on average and inflation has been 3% per year, the purchasing power of your money has grown by 4% minus 3%, i.e. 1% per year on average.
Formulas: All our software is open source, and you can see the calculation logic here.
Warning: Past performance is no guarantee that future performance will be the same. Avoid the temptation to switch funds based on last year’s results. Evaluate the return on your pension assets over a long period and consider other factors (such as your risk tolerance and the number of years until retirement) before deciding to make changes to your portfolio.