On August 1, new regulations went into effect for Estonia's second-pillar of mandatory individual accounts that increase workers' flexibility to switch pension funds, impose stricter investment limits for conservative funds (the least risky of the three categories of pension funds), and promote greater program transparency. These new regulations are the result of the Ministry of Finance analyses of the impact of the financial crisis on the second pillar, which focused on the most critical issues of investments, disclosure, and risk management.

In Estonia, the five pension fund management companies offer three types of funds with varying degrees of risk: (1) conservative funds, with no equity exposure; (2) balanced funds, with up to 25 per cent invested in equities; and (3) aggressive funds, with up to 50 per cent in equities. Under the new regulations, workers can switch pension funds three times a year (in January, May, and October), up from only once per year previously. Although contributions are paid to only one fund at any given time, previously paid contributions can either be left in the old fund or transferred to the new fund. As a result, workers could have accounts in several different funds over their full working careers.

Other key elements of the new regulatory framework include the following:

- Stricter investment restrictions for the conservative fund. Investment options are more limited than under the previous regulations, and investments in bonds must conform to certain credit rating requirements.

- Increased disclosure requirements. Pension fund management companies are now required to produce and submit monthly investment performance reports to pension fund members. Previously, performance reports were issued only twice per year.

The Estonian pension system consists of a first-pillar, public pay-as-you-go program; second-pillar individual accounts, which are mandatory for new entrants to the labor force and workers born after December 31, 1982; and third-pillar voluntary individual accounts. By the end of last year, 662,700 Estonians held mandatory individual accounts, and 53,400 held voluntary individual accounts. Assets under management were approximately 16.8 billion kroons (USD 1.4 billion) in the second pillar and an additional 1.4 billion kroons (USD 119 million) in the third pillar.

Source: Social Security Programs Throughout the World: Europe, 2010, US Social Security Administration, August 2010; "Estonia," International Update, US Social Security Administration, May 2010; "Estonian Financial Market as at 31.12.2010," Estonian Ministry of Finance; "Q&A with Government Adviser Kertu Fedotov on Estonian Pension Reform," IPE.com, August 5, 2011; "International Headlines," Mercer, August 10, 2011.

Implementation date: 08.2011