Law amendment

Pillar II: In October, the ball is in the hands of pension collectors

Kaija Salu Kaija Salu

In summer 2020, the state suspended its payments to the second pension pillar of working people. During October, however, people will be able to decide whether or not to continue paying 2% of their gross salary to the pension fund.

Before the beginning of the COVID-19 crisis, the contribution system to the second pension pillar was as follows: 2% of the gross salary of an employed person went to the pension fund of their choice and the state added 4% at the expense of individually registered social tax. However, during the COVID-19 crisis, the government decided to suspend its contributions from 1 July 2020 to 31 August 2021, for 14 consecutive months.

What does the employee have to do?

Employees now have the right to decide in October whether to continue with their 2% gross salary contributions as before or to suspend contributions for nine consecutive months, from 1 December 2020 to 31 August 2021.

If the employee wants to continue making contributions, they do not have to do anything. Everything will continue as before and 2% of their gross salary will be withheld for their chosen Pillar II pension fund.

If the employee wishes to temporarily suspend their contributions, they must submit an application for temporary suspension of contributions either to https://www.pensionikeskus.ee/en/ self-service or to the bank managing the pension account. The deadline for submitting an application is October 31, 2020. An application that has already been submitted can no longer be changed and submitting an application costs 65 cents. Upon application, this means that from 1 December 2020 to 31 August 2021, 2% of their gross salary will not be withheld from Pension Pillar II and will be paid as a net salary. It is then up to the person to decide whether to use the money received to cover daily expenses or to save / invest it in the way of their choice. To calculate the estimated amount of your future pension and find out the effect of the 2% suspension of payment, you can use the pension calculator on the website of the Social Insurance Board: https://pension.sotsiaalkindlustusamet.ee/en.

Exceptions to the suspension of payments are people born between 1942 and 1960 who are already of retirement age but are still active in the labor market. In these cases, the state will continue to make 4% contributions. However, if people born between 1942 and 1960 want to suspend their contributions, they also have the right to apply. In this case, both their 2% contribution and the 4% state contribution will be suspended from December.

What does the employer have to do?

From 1 November 2020, employers will be able to check whether or not their employees continue to contribute to a funded pension. In most cases, this means more work for the accountant or payroll clerk.

The connection request can be checked on the Pension Center's website either with a simple request, i.e. by one personal identification code, or with a mass request if the number of employees in the company is very large (mass inquiry costs 30 euros for checking up to 4000 personal identification codes). Also, today, a large number of payroll programs are interfaced with the Pension Center query, and thus automatic checks can be performed in the payroll software. The first payroll software providers have already introduced updates to control the suspension of the temporary pension pillar contribution, and other software providers have promised to do so in the near future.

It is important to note that the current change concerns cash-based payroll or TSD declarations from December 2020 to August 2021. That is, the employer, in cooperation with the accountant or payroll officer, must monitor whether they pay the month ending in December or the current month's salary in December.

What's next?

The state has promised to pay compensation in 2023 and 2024 to those who continued to pay 2%. It is explained on the website of the Ministry of Finance that the state will then pay twice as much for each person to its second pillar as the person made from 1 July 2020 to 31 August 2021. If the average return of Pillar II pension funds is positive from 1 July 2020 to 31 December 2022, the amount transferred from the state budget to each person in Pillar II will also increase by the average return.

However, the suspension of contributions to the second pension pillar is only a temporary measure. The future will show what will happen to pensions. On October 20, the Supreme Court ruled that making the second pension pillar voluntary is in accordance with the Constitution. It gives people the opportunity, but not the obligation, to withdraw money from the pension fund. As a new option, people continue to invest the collected funds. Those who decide to withdraw the money raised must take into account that 20% income tax will be levied on the money withdrawn and the first payments will be made in September 2021.

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