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The coalition’s pensions reform bill is not unconstitutional, the Supreme Court has ruled.

The Tartu-based top-tier court rejected President Kersti Kaljulaid’s case that the bill, passed by the Riigikogu early on this year, was unconstitutional in that it treated members of the so-called second pillar of the Estonian pension scheme – referring to employer/employee contributions – differently from those who would opt out of the pillar on the basis of the bill, or who had never joined it in the first place.

The court did find the bill violated certain fundamental property rights, but not at a constitutional level. The Supreme Court also did not find the bill would necessarily deprive individuals of the right to an old-age pension (see below for details of the court’s judgement).

The second pillar had been mandatory for most Estonian wage earners since 2010, but the pension reform bill would make membership optional.

The bill was the brainchild of the Isamaa party, who managed to get its inclusion into the coalition agreement signed with Center and the Conservative People’s Party of Estonia in late April 2019.

Applicants would be able to reimburse their pension pot for any pension agreement concluded before January 1 2021.

Supporters of the bill say it would allow more flexibility in how people manage their savings and pensions, while opponents say it will lead to a short term shock to the economy, followed by a longer-term situation where pension funds are depleted at a time when the population is aging.

President Kajlulaid returned the bill unsigned, as per her constitutional role, on February 7. In accordance with procedure, the bill went before parliament for amendments and a further vote. While the bill passed the vote, it had not been significantly amended, leading to the president rejecting giving her assent a second time, in mid-March, and sending the matter to the Supreme Court.

The ruling means as things stand the bill will enter into effect from January 1 2021.

Supreme Court findings in detail

The Supreme Court found that the pensions reform bill does indeed infringe the fundamental right to property and equality and freedom of enterprise. However, on the basis of current forecasts, it was not possible to conclude with sufficient certainty that the constitution was being violated. The objectives of the reform – in particular to increase people’s freedom of choice – outweigh the violations of fundamental rights and a number of solutions have been put in place to offset these.

The Supreme Court agreed with the president that the constitution confers a separate right to receive state assistance in old age. At the same time, the constitution does not stipulate the manner or specific amount of the provision of old-age benefits, but leaves them to the legislator to decide. The court is entitled to intervene only if the level of old-age assistance required by the constitution is clearly not guaranteed or the scope and conditions of the assistance are arbitrarily worsened by law.

The abolition of the mandatory funded pension or a significant change in the system alone does not mean that state aid will automatically fall below the level required by the constitution. The court did not consider it likely that the most negative forecasts would be fulfilled, and thus the fundamental right to old-age benefits would not be violated.

According to the Supreme Court, the reform may have a negative impact on the financial situation of people who wish to continue collecting their pension in the second pillar. According to forecasts, a considerable number of unit-holders will demand the payment of money, which will force the funds to invest money in more easily realizable and less profitable assets. At least in the short term, this would reduce returns and infringe on unit-holders’ fundamental right to property.

At the same time, the reform also provides for a number of solutions to mitigate the possible negative consequences, and according to forecasts, there is no reason to believe that the funds will not be able to make disbursements. There is a lack of reliable data on the long-term impact of the law and whether and how quickly the volumes and returns of the funds could recover. In view of the above, according to the court, the violation of the fundamental right to property is not intensive and it is justified by the objective of increasing people’s freedom of decision.

The Supreme Court also analyzed the impact of the reform on the fundamental right to property of people currently receiving a second-pillar pension and reached a similar conclusion.

The Supreme Court stated that the reform also violates the fundamental right to equality. As a result of the reform, people who have joined the second pension pillar will be able to withdraw money from the fund and thus will be free to use the 4 percent part of social tax that the state contributed to the fund for them. This can have a similar effect on the tax refund. Non-members of the second pillar will not receive a refund in this way.

According to the court, making payments from the state budget to non-members of the second pillar would be very complicated and costly, which is why unequal treatment is justified and the violation is in accordance with the constitution. Finding a fair amount would be difficult, as public pensions are affected by indexation, while the value of units is affected by the performance and costs of the funds.

The reform was also analyzed from the point of view of the freedom of enterprise. The law provides recipients of pensions from the second pillar with a new basis for canceling the pension contract and the payment of the accumulated money.

The new order creates the risk that the contract will be canceled primarily by pensioners who, based on health data, believe that their life expectancy is shorter and consider it more profitable to withdraw money at once. This, in turn, would lead to an increase in the average life expectancy of the fund’s clients and an increase in costs. In addition, the fund loses the opportunity to earn income from investing premiums and managing contracts due to the cancellation of contracts.

According to the Supreme Court, this infringes on the freedom of entrepreneurship and legitimate expectations of insurers, but not too intensively. The possibility of canceling a pension contract is a one-off and temporary solution. In order to mitigate the risks, the law provides for a cancellation fee, an opportunity for the funds to stop distributing profits to pensioners and, finally, to transfer the performance of contracts to the state.

In the opinion of the Supreme Court, the problems mentioned in the president’s application were in themselves serious and it was justified to bring them to court. If a law has a wide-ranging effect, affects a large number of people and causes fundamental disagreements in society, it is reasonable to assess its constitutionality before it enters into force.

In addition to resolving the issues raised by the president, the Supreme Court noted that linking the law to the issue of trust, which simplified and accelerated its adoption in the Riigikogu, is also subject to constitutional review. The light use of this measure could lead to a stalemate in the parliamentary debate. In the present case, however, no violation was found because the government used the issue of trust because of the opposition’s obstruction tactics.

The president must now promulgate the challenged law and it will enter into force on the tenth day after its publication in the State Gazette, except for the provisions for which the law prescribes a different date of entry into force.

Editor: Andrew Whyte