Thousands of Estonians have until June 1, 2002, to decide whether to take out a pension under the compulsory endowment fund and to choose between six institutions offering such pensions.
Joining the compulsory endowment fund is mandatory for people below the age of 18 while those over that age have a fixed period of time, based on their age, in which to choose whether to join.
People aged 51 to 60 must decide by June 1, 2002, those between 46 and 50 by Nov. 1, 2002, and those between 42 and 46 by Nov. 1, 2003.
Sums paid into the scheme can be inherited and people can change funds.
The six financial institutions which have expressed a desire to manage the compulsory pension funds include Estonia's three biggest banks - Hansapank, Eesti Uhispank and Sampo - as well as the LHV investment bank and the life insurance companies Ergo Elukindlustus and Seesam Elukindlustus.
According to an anonymous source Hansapank and Uhispank will spend about 20 million kroons ($1.14 million) each on marketing the scheme. Otherwise, they remain tight-lipped about their attempts to win the public's faith.
"There's going to be a lot of fighting," said Andres Parloja, sales director at Eesti Uhispank's Asset Management.
"We do not want to publish our sales campaign ideas in case we lose our advantages."
Eesti Uhispank's parent company Skandinaviska Enskilda Banken is willing to devote a level of expertise to marketing its second pillar pensions unmatchable by Swedbank and Sampo, he added.
Indrek Neivelt, director of Hansapank Group, retorted that "unlike other banks Hansapank is not accustomed to losing money."
Hansapank, which currently controls more than 70 percent of private client deposits, believes it can win a 60 percent share of the second pillar pension funds market.
LHV's strengths are its professional fund management skills and employees, said Robert Kitt, fund manager at LHV. "I don't want to disclose any other information since none of our competitors have yet revealed their cards," he said.
Ergo Elukindlustus' second pillar pension schemes appear to be still at the drawing board stage.
"Yes, we're interested, but we need time to plan this all before we can give any comments," said Kaido Kepp from Ergo Elukindlustus.
What is certain is that demographic trends mean Estonians will not be able to make ends meet from state pensions in the future.
"Research shows that there are 1.5 employees per every pensioner today and in 30 years there will be an equal number of employees and pensioners, whereas in the United States there are 3.5 employed people per pensioner, so it is vital to secure retirement benefits for oneself rather than depending on the state pension or the first pillar of the pension reform," said Loit Linnupold, chairman of Eesti Uhispank's Asset Management.
All of the six companies currently preparing to participate will offer at least two funds because the state has set strict restrictions on how they invest money paid into the funds.
Each pension provider is required to supplement its aggressively managed "balanced fund" with a conservatively managed fixed income fund.
Money deposited in fixed income funds can only be invested in deposits and bonds, while up to 50 percent of the balanced funds can be invested in stocks and up to 10 percent in real estate. All the fund managers cautioned that fixed income funds are barely profitable.
Legislation forbids fund managers from giving any estimates about the future profitability of their funds, but some offered general hints.
"If we take the average profitability of bonds, which is 5 percent, and subtract the company's expenses, which are 1 percent to 1.5 percent, we receive a 3 percent to 3.5 percent profitability margin from fixed income funds," said LHV's Kitt.
"The average profitability of stocks in the last 100 years was 12 percent, so if we invest half of the money from the balanced fund in stocks and the other half in bonds we could expect their profitability to be 6 percent to 7 percent."
Seesam Management predicts profits from its funds will be 4.4 percent to 6 percent while Hansapank predicts its fixed income fund will produce yields of up to 4 percent and its balanced fund profits of 8 percent.
"With the fixed income fund we aim at beating inflation, which should drop from the current 5.7 percent," Hansapank's Poldoja.
Under the second pillar employees will pay 2 percent of their income and the Tax Board will contribute 4 percent of the 20 percent social tax which they currently pay under the first pillar.
The state will cover such payments by the Tax Board, which are expected to total up to 1 billion kroons per year.
Uhispank is the only company that has publicly announced it will raise by 2 percent the salaries of those of its 1,300 employees who decide to join the pension fund.
Ulla Ilisson, director of life insurer Sampo Elukindlustus, warned that a lack of clarity in the pensions legislation means that questions remain over pensions payments.
When distribution of pensions begins in 2007, claimants will be able to choose between two contracts.
Annuity contracts lasting for a fixed period will enable claimants' heirs to inherit a pension during that period while another ordinary annuity contract will not allow pensions to be inherited but will offer higher payments.
According to research, 15 percent of working age people - some 100,000 people - would like to join the system in the first year and by the end of the fifth year half of all employers say they will have joined the second pillar. By the end of the fifth year the amount of money in the pension funds should reach 7 billion kroons, said Linnupold.
The third pillar of the voluntary endowment pension, which was introduced last year, enables people to pay up to 15 percent of their income tax free into one of four licensed pension funds (Hansapank, Uhispank, Sampo and LHV).
Only about 5 percent have made use of this, but their number may increase with the introduction of the second pillar as pension endowments become more widely understood.
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