The average salary in Estonia does not automatically guarantee a financially secure retirement, Luminor Pension Funds has warned.

Luminor Pension Funds fund manager, Vahur Madisson, argued that future pension provision depended on how consistently people save for retirement, not solely on salary.

He noted that while it was often believed that the average Estonian salary would ensure a sufficient pension, the state pension alone may not be enough to live with ‘dignity’.

"If a person earns the average Estonian salary and relies only on the first pillar in retirement, the pension may amount to approximately 30–35 percent of their pre-retirement gross salary in the future,” Madisson continued.

“Such a replacement rate means a noticeable decline in the standard of living for many.”

Furthermore, the real value of a pension is impacted by inflation, and while pensions increase over time, high inflation can reduce purchasing power.

“Pension funds invest, for example, in stocks and bonds, which have helped to mitigate the impact of inflation over a long period of time,” Madisson said.

“Therefore, the second and third pension pillars are important not only for increasing pensions, but also for maintaining their purchasing power.”

The economic situation in Estonia can also affect the size of pensions, although Luminor emphasised that this did not mean a sufficient pension was unattainable, and personal savings for retirement can mitigate risk.

“If, in addition to the first pillar, you also save consistently in the second and third pillars, it is possible to increase the pension replacement rate to 60–70 per cent of pre-retirement income,” Madisson stated.

“Regular contributions and compound interest play an important role in achieving this, which significantly increases the accumulated assets over decades.

“It is not only the size of the contribution that is important, but also its consistency. Even smaller regular contributions can grow into a considerable additional income over decades with the help of compound interest, which helps to maintain the current quality of life in retirement.”

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