Estonian pension fund fees sharply above international average
Estonian fund managers may have to revamp the triple fee structure they charge to participants of the country’s second pillar pension. The issue has become a contentious one in the €750m market at a time when equity returns are proving to be particularly challenging. The topic of fees gained currency in 2007, a year during which Estonia’s stock market lost 7.7% of its value.
While the five Estonian asset management companies have on average less than 5% invested in pan-Baltic equities, returns for balanced and progressive second pillar assets have proved to be challenging in the last 12-months into April. Hansa Pension Fund K3 lost 3.47% while Sampo Pension 50 dropped 2.45% during the past year. Both are higher risk/return funds with a mix of equity and bonds.
Historic real returns for all 15 second pillar funds since 2002, when assets were first invested, have averaged 4.9% annually. As returns have come under pressure in current market conditions public pressure has grown to reduce asset manager fees for pillar II. Currently, the exit fee limit is 1%. There is no limit for entry fees. Management fees have a limit of 2%. Hence, returns for pensioners and contributors can be considerably lower when accounting for the triple fees structure.
Closed domestic market
The largest participants in the Estonian market are Hansapank, SEB Bank, Sampo (owned by Danske Bank), LHV and ERGO. The market leader Hansa has a high risk high return fund (K3) which has had the worst performance in its category in the past year, yet charges some of the highest fees. Subscription fees for such funds can be as high 1.5%, redemption fees 1% and management fees 1.49%.
The average management fee for a 25/75 equity/bond fund at Sampo is 1.75%. Sampo’s redemption and subscription fees for the same fund are 1% respectively, according to Aari Stalde, portfolio manager at Sampo. Should a participant decide to switch funds on a yearly basis (they are allowed to do so once a year), the fees could be as high as 4% on assets, considerably higher than international norms. “The regulators want us to bring down the fees,” says Stalde, who concedes fee levels outside Estonia are on average considerably lower.
Sampo has 13% of Estonia’s second pillar pension market. Three banks, Hansa, SEB and Sampo (part of Dansk Capital starting in June) manage more than 90% of the second pillar pension market and barriers to entry remain high. The pillar II investment management market is heavily concentrated with the largest fund management company, Hansa, running 53% of assets. A pension fund can only be managed by a company registered in Estonia.
The high fees and relatively closed market have prompted the Ministry of Finance to respond with new reforms. The Ministry has drafted changes to the fee structure to be considered by parliament in October. The outcome, however, is far from certain. Another proposal will lift the equity investment limit on funds from 50% to 70%.
“There is strong public pressure that the fees are too high,” says Veiko Tali, Deputy Secretary General at Estonia’s Ministry of Finance. “We are accordingly introducing three changes. We are proposing to completely abolish the entry fee. Second, management fees will be regressive and based on the value of assets under management. Funds with higher assets under management will charge a lower management fee. Finally, we are proposing that workers close to retirement will not be charged an exit fee. But we cannot determine the outcome.”
VB
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