Maido Lillemets, Legal and Compliance Manager at BaltCap in Estonia, reports that the three-pillar pension system in his country has been shaken by the recent legislative move from a mandatory to a voluntary approach to contributions into pension funds. This change, Lillemets reports, has cost the pension funds EUR 850 million already and the eventual cost may exceed EUR 1 billion.
“Until last year, contributions to the second pillar of our pension system were obligatory,” Lillemets says, explaining that the second pillar consists of privately owned pension funds. “However, since January 2021, contributions to the pillar were made voluntary, so people can now apply not only to stop the ongoing payments into it, but also to withdraw their money from it."
According to Lillemets, such a radical change will most likely affect the liquidity of pension funds belonging to the second pillar. In turn, he believes, the drop in contributions to the fund will cause a drop in both the number and volume of pension funds’ private equity and venture capital investments in the region. “Since pension funds must now take into account that people will be able to withdraw their money from the system, they will not be able to invest in illiquid asset classes as they used to,” he says. Some of the funds may opt for feeder fund structures in order to overcome this obstacle. Through such feeder funds, PE and real estate funds are hoping to attract retail investors and pool resources together in order to continue investing in the region.
However, the change to the pension system might pose a threat to people as well. Lillemets suggests that the first pillar, which remains mandatory and is funded by taxes, will not be sustainable due to the discrepancy between the dwindling working population and the growing number of pensioners. “In the long term," he says, "the state will probably have to raise taxes in order to fill the gaps in the first pillar."
In addition, Lillemets points to the EU Sustainable Finance Disclosure Regulation, which will come into force on March 10, 2021. According to him, It will impose new environmental, social, and corporate governance regulations aimed at making investments eco-friendly and sustainable. In turn, he says, the regulation will bring about a drop in non-ESG-compliant investments.
Finally, looking into the future, Lillemets expects the legal sector to face technological challenges. According to him, the need to implement smart solutions for marketing, communication, and doing business persists. “With lockdowns still in place," he reports, "it is as important now as it was last year for lawyers to keep developing their technological prowess."