Raina Loom
Constitutional review analyst of the Supreme Court
Introduction
The decision of the Supreme Court en banc on 20 October 2020 in the constitutional review (so-called pension reform) case no. 5-20-3 / 43 will undoubtedly go down in history. By this decision the Supreme Court en banc rejected the petition of the President of the Republic of Estonia to declare the “Act Amending the Funded Pensions Act and related acts (compulsory funded pension reform)” [1] (Act Amending KoPS or reform act) passed by the Riigikogu on 11 March 2020 unconstitutional. In the opinion of the author of the article this decision changes the current understanding of the boundaries of the protected area of § 28 (2) of the Constitution of the Republic of Estonia. At the same time the decision also sends a message about the possibility of implementing reforms with far-reaching effects. The funded pension reform made by the Act Amending KoPS is undoubtedly such a reform. This reform significantly increased the person’s freedom, but also his/her responsibility for deciding on one’s pension savings. The freedom given by the reform to withdraw the money collected so far means a greater responsibility to think about one’s income in the future and at the older age. At the time of writing this article it is known that there were almost 100 000 people[2] wishing to leave the second pension pillar by the end of February 2021. Considering the significant interest in leaving the second pillar, the author of the article highlights the most important messages of the Supreme Court’s decision, which will most likely provide food for thought in the future for resolving legal problems that may arise.
The implementation of the funded pension reform could lead to unconstitutional situations
The Supreme Court made sure that the Act Amending KoPS infringes the right to assistance in old age, fundamental right to property and equality and freedom to conduct a business. In conclusion, the Supreme Court en banc found that the violation of the Constitution could not be concluded with adequate certainty within the framework of abstract norm control and on the basis of the forecasts available at the time of resolving the case, and the objectives of the pension reform outweighed the identified violations. The Supreme Court en banc acknowledged that in a specific case the implementation of the law may lead to an unconstitutional situation, if the risks associated with the amendment to the act materialize for someone to a greater extent than expected. The Supreme Court en banc emphasized that the position of the Supreme Court in this case does not preclude the assessment of the constitutionality of the same norms also in case of a new abstract norm review procedure in the event of a change in the legal or factual situation.[3]
According to the author of the article the dissenting justices of the Supreme Court refer in their opinion very clearly to the situations in which a violation of the Constitution may occur.[4] The justices of the Supreme Court emphasized that the ones who joined the funded pension do not form a homogeneous group with one-way interests. Some of the members are interested in the rapid consumption or investment of the jointly collected capital outside the pension system, while others are interested in maintaining and increasing it in pension funds, in a system with greater state regulation than usual. The early payment of accumulated pension assets affects not only those who have joined the second pillar, but all future pension recipients. The premature disbursement of accumulated assets creates a gap in the pension system and public finances and risks, the fulfilment and mitigation of which may in the future complicate the performance of other state tasks and create serious tensions between social groups. The dissenting judges also found that the actions of the legislator were arbitrary and thus in conflict with § 3 and 11 of the Constitution[5], as they do not contribute to the achievement of the real goal of the reform – to improve the pension system. The liquidation of the funds collected to ensure the assistance provided for in § 28 (2) of the Constitution, meaning the material guarantees of the fundamental right of old age, cannot be justified by a purely theoretical possibility to replace these funds with something else in the indefinite future or to offset the risks that are currently being created at a later date with means that are currently unknown. The granting of the right to withdraw pension savings from the system would have required immediate and clear guarantees for the persons whose only or main savings in support of old age have been units in mandatory funded pension funds for many years.[6]
At the same time it is perfectly understandable that the Supreme Court en banc showed confidence in the legislator by its decision. The Supreme Court en banc noted that the determination of the unconstitutional situation would presuppose that the state is unlikely to have the possibilities to prevent or eliminate the violation of a fundamental right that may arise in the future by other social policy measures. It was not possible for the Supreme Court en banc to draw such a conclusion. The Supreme Court also acknowledged that the objectives of the reform – in particular, to increase people’s freedom of choice – outweigh the violations of fundamental rights and several solutions have been introduced to balance the negative effects of the reform. Among other things, the Supreme Court en banc emphasized that the state can ensure the sustainability of the pension system and fulfil the obligation to provide adequate old-age assistance to individuals only if the sustainability of the pension system and the factors affecting it are consistently assessed in the future. The contested law obliged the Ministry of Finance to prepare an analysis of the effects of making the mandatory funded pension voluntary provided for in the Act Amending KoPS by 2023 and, if necessary, submit proposals for amending legislation. The Government of the Republic was also required to prepare an analysis of the financial and social sustainability of the pension system by 2023 and every five years thereafter, and to submit proposals to the Riigikogu to change the pension system if necessary.[7]
The Supreme Court en banc based its decision on the pension reform on the current practice of interpreting the Constitution. Until now, the understanding remains that since the state’s economic and social policy and budget are shaped by the Riigikogu and the volume of fundamental social rights depends, among other things, on the state’s economic situation, the legislator determines the conditions, scope, procedure and types of assistance.[8] Regardless of the extensive decision-making power of the state in shaping social protection, fundamental social rights are subjective and judicially protected rights.[9] The court may not take the place of the legislative or executive power in implementation of social policy when reviewing if fundamental social rights are respected.[10]
The right to assistance of old-age means more than the right to assistance in case of need
§ 28 (2) of the Constitution states that Estonian citizens have the right to assistance from the state in the case of old age, incapacity for work, loss of a provider or need. The categories and extent of assistance, and the conditions and procedure for the receipt of assistance shall be provided by a law. Citizens of foreign states and stateless persons who are in Estonia have this right equally with Estonian citizens, unless otherwise provided by law. In the opinion of the author, the Supreme Court en banc, by its decision, shifted the understanding of social risks provided for in § 28 (2) of the Constitution broader than the previous understanding. According to the current understanding, in case of social risks protected by § 28 (2) of the Constitution, the obligation to provide assistance is based on the principle of the welfare state provided for in § 10 of the Constitution. When opening the principle of the welfare state, the Supreme Court has clarified before the decision on the pension reform that the principles arising from § 10 of the Constitution form the core of the basic order of the Republic of Estonia and are the most important provisions of the legal order.[11] Fundamental social rights can be deduced from these principles, including the rights specified in § 28 of the Constitution.[12] § 28 (2) of the Constitution mentions four risks – old age, incapacity for work, loss of a provider or need – in which a person should be assisted. The Supreme Court has also considered unemployment and indirectly disability to be protected by § 28 (2) of the Constitution.[13]
In its decision on the pension reform, the Supreme Court stated that § 28 (2) of the Constitution explicitly distinguishes the right to old-age assistance from aid guaranteed by the same provision against other social risks and from the right to state assistance in case of need. The right to assistance in case of need gives a person the right to demand from the state and obliges the state to provide assistance that would provide the person with the minimum necessary means and services to cope. [14] The need within the meaning of the Constitution should be understood as a situation where a person does not have the minimum means to cope. The State’s obligations to old-age assistance, on the other hand, go beyond the obligation to provide the minimum means of subsistence. According to the opinion of the Supreme Court en banc, in addition to reducing the risk of poverty, the aim of state old-age assistance is to create a system that would ensure that the standard of living of persons does not fall unreasonably low compared to the level of their working age. The objective of protecting the elderly as a socially vulnerable group and those in greater need of assistance at a higher level from the assistance provided only in case of need can also be deduced from the principle of the welfare state.[15] The Supreme Court noted that if the state has established an assistance system for fulfilling its obligations arising from § 28 (2) of the Constitution, which provides old-age assistance to the persons through other persons or in private law, such assistance should be considered state old-age assistance within the meaning of § 28 (2) of the Constitution and this assistance should be taken into account when assessing the minimum level of aid required by the Constitution.[16]
The Supreme Court noted that in the event of the abolition or significant reduction of the mandatory funded pension, the state aid guaranteed to a person in old age may fall below the level required by the Constitution. However, the mere abolition of the mandatory funded pension or a significant change in the system does not mean that the state aid will automatically fall below the rate required by the Constitution if the state provides a minimum old-age assistance through a state old-age pension or otherwise. § 28 (2) of the Constitution does not require the provision of old-age assistance just through the mandatory funded pension system. The state can also perform its tasks directly, without delegating its functions to anyone. The state may also, in principle, change the system once established if it ensures the performance of its constitutional functions otherwise. However, the amount of aid granted by law pursuant to the second sentence of § 28 (2) of the Constitution may not be reduced or its conditions may not be worsened arbitrarily.[17]
The question of whether the level of protection of old-age assistance required by the Constitution may fall below the permissible limit for some persons or groups of persons is one of the issues that will most likely arise on the agenda when implementing the Act Amending the Funded Pensions Act. The issue is also multifaceted by a very diverse circle of working people, whose employment relationships and old-age risk insurance are not limited only to the Estonian three-pillar pension system.
It is important that according to the current practice the state should provide assistance to a person in case of risks protected by § 28 (2) of the Constitution. The Supreme Court has found that the legislative power is ultimately obliged to ensure the realization of fundamental rights and implementation of the basic principles of the Constitution. When involving private parties, the public authorities should put effective control mechanisms in place so that the private party cannot be arbitrary in providing assistance and leave the person in need of assistance without assistance.[18] In the opinion of the Supreme Court en banc, there was no reason to believe in the pension reform case that the legislator would not fulfil its obligation or that it did not have the means to prevent or eliminate an unconstitutional situation that may arise in the future.[19]
It is important to emphasize that so far the obligation arising from international law to gradually increase the level of social protection has been emphasized (Article 12 (3) ESH, Article 2 (1) MSKÕP) and the prohibition to easily abandon the level of social protection already achieved, incl. the social insurance system should be fully replaced with the full social assistance system, meaning the state aid for people in need in their last distress.[20]
According to the author of the article, the legislator may face the difficult question of how to ensure a level of old-age assistance that would not fall unreasonably below the level of protection achieved so far in the future. In this context, the question of what should be an appropriate social security system that provides adequate assistance to those in need also needs to be addressed.
The right to old-age assistance means the responsibility of both the person and his/her family
In addition to the fact that the Supreme Court emphasized the possibility of being flexible in providing assistance, the Supreme Court en banc reiterated in its decision that similarly to other social risks specified in § 28 (2) of the Constitution, the state is not solely responsible for providing old age assistance, but the person and his/her family are responsible for their own subsistence.[21] The person’s own responsibility to ensure that he or she is guaranteed a higher level of assistance in old age than assistance provided solely to prevent the need lies primarily in his or her (or another person’s, e.g. employer’s) contribution to state-established social protection systems to the extent, under conditions and in accordance with national procedures. The second sentence of § 28 (2) of the Constitution prescribes that the types, scope and conditions and procedure for receiving assistance provided in old age are stipulated by law. If the legislator has determined a person’s contribution to social security systems for himself or herself or on his or her behalf as a precondition for receiving old-age assistance, the person becomes entitled to such assistance only if he or she has fulfilled these conditions. The right to receive old-age assistance from the state is violated if the system of granting assistance established by the state does not guarantee assistance to persons in old age to the minimum extent required by the Constitution. In case of the assistance granting system, the Supreme Court emphasized that the provision of state aid in old age, including in the form of pension insurance, is not a task of the state which should necessarily be performed only by a state agency, this task can be delegated to the private person at certain terms.
The Supreme Court noted that the rate of the minimum old-age assistance required by the Constitution may change over time. Given that, like other fundamental social rights, the constitutionally required scope of old-age assistance is not precisely measurable and that this is an area that allows the legislator a wide margin of discretion, the court is only entitled to intervene if there is a clear discrepancy between what is established by the legislator and what is required by the Constitution and adequate assistance to a person is not guaranteed.[22]
The opinion of the Supreme Court en banc that people themselves can direct the effects of the pension reform to a significant extent for themselves is worth mentioning. Even according to the most negative development scenarios the reform may lead to a reduction in the pensions of those who withdraw money from the second pension pillar as a lump sum before reaching retirement age. In the future, early withdrawal of money can be taken into account when assessing the constitutionality of the scope of state old-age assistance.[23]
Thus, in the opinion of the author of the article, it is worthwhile for each member of a funded pension to measure seven times before deciding to withdraw the pension assets accumulated so far, whether the current withdrawal has a sufficiently positive effect for the future or whether it is worth allowing the money collected so far to grow to a greater extent.
A unit of a mandatory pension fund belongs within the protection of the fundamental right of ownership
A separate value in case of the decision on the pension reform is also the fact that the Supreme Court en banc confirmed that a unit of a mandatory pension fund is a proprietary right and belongs within the protection of the fundamental right of ownership. In defining this right, it is important that the mandatory pension fund is a contractual investment fund, which is a group of assets jointly owned by the unit-holders, and the fund unit expresses the unit-holder’s participation in the fund’s assets. The number of units owned by a person depends on the amount of money received by the fund on its behalf and the issue price of one unit (net asset value of the unit at the time of issue).[24]
The Supreme Court en banc clarified that upon entry into force of the Act Amending the Funded Pension Act, a unit-holder has essentially three options – not to withdraw money from the second pension pillar, withdraw units and direct money to a pension investment account or demand payment of units. There are certain risks associated with all options.
- If the fund remains, the value of the unit may decrease (due to transactions made for the payment of units of other persons) and it is not known what the investment environment will look like in the long run.
- The fund units should be redeemed in order to be transferred to the pension investment account, but there is also a risk that a large number of people will apply for redemption during the same period, which may affect the net value of the unit. In addition, the pension investment account does not have the benefits of collective investment, and the success of the investment depends on one’s own skills.
- The third option – to demand the payment of units – also involves the risk that the value of the unit may be reduced. In such a case income tax should also be paid more than when payments are made at retirement age (§ 4 (2) of the Income Tax Act). Then the person does not receive the funded pension in retirement. The person’s first pillar pension is also smaller, as at the time of making the contributions to the second pillar pension fund, 16% of the social tax calculated for him/her was received in the state pension insurance funds instead of 20%.
The Supreme Court en banc stated that the intensity of the violation of the fundamental right to property depends primarily on how strongly destabilizing the primary impact of the reform is on pension funds upon the entry into force of the Act Amending KoPS and in the subsequent period. The volume and performance of the funds in the long run, when the activities of pension funds could reach a new balance, depend on the impact in the short run. Assessing the intensity of the interference, the Supreme Court en banc acknowledged that the assessment of how many people and to which extent demand the early disbursement of the fund and the consequences for unit-holders is a forecast based on generalized data that can be taken into account in the constitutional review proceedings. [25] The Supreme Court en banc assessed that taking into account the provided forecasts, the matter can be resolved on the assumption that a considerable number of unit-holders, whose withdrawals may form a significant part of the assets of the funds, require the payment of money upon entry into force of the act. At the same time, the Supreme Court en banc also found that in resolving the case they did not have serious information at its disposal that even if a significant part of pension assets were withdrawn from the second pillar funds, the values of fund units would decrease significantly. Even if the reduction occurs in the short term, it is not possible to assess with sufficient probability what the longer-term effects of the law will be and whether and how quickly the volumes and returns of the funds could recover. Relying on the fact that the legislator had provided several mitigations to enable the payment of assets, as well as the low probability of a liquidity crisis in funds, the Supreme Court en banc took the position that the infringement of the fundamental right of ownership of the unit-holder of a mandatory pension fund is not intensive, therefore the aim of the legislator to increase the decision-making freedom of unit-holders justifies the infringement.[26]
The dissenting judges, unlike the majority of the Supreme Court en banc, found that the case did not indicate the need to pay out the pension assets collected in the second pillar, infringe fundamental rights and take financial risks. The premature disbursement of a significant part of the capital raised for pensions does not strengthen the pension system, including its second pillar, but makes this more fragile. The pension system could be reformed in a number of ways so that the funds already collected at the expense of the social tax would remain in the pension system and would help to diversify and mitigate the risks associated with old age in the future. The maintaining of these resources in the pension system is necessary for equal treatment of members and non-members of the second pension pillar. This would also avoid unnecessary interference with the right of ownership.[27]
Among other things, the judges pointed out that the withdrawal of money from the pension system enabled by the Act Amending the Funded Pensions Act is a clear step in the opposite direction to strengthening the pension system. The problems of the pension system referred to in the enactment of the reform act can be reduced to the shortage of money accumulated in the funds and low performance of the funded pension funds. The disbursement of money further increases the shortage of money. The reform would have presumed immediate and clear guarantees for those whose only or main savings in support of old age have been units in mandatory funded pension funds. In order to protect the rights of unit-holders who do not dare to leave their assets in the reformed second pillar due to the risks involved in disbursement and do not wish to withdraw these from the pension system, additional guarantees should have been put in place to protect the pension assets accumulated, for example, the possibility to transfer the accumulated assets of the pension fund to the first pillar. Additional guarantees are necessary to protect both the fundamental right to old age and the right of ownership that extends to the assets left in the pension system. [28]
Conclusion
According to the author of the article, several indicators make the case historical. First, the pension reform was transformed into a serious reform in the modern legal space by a significant increase in an individual’s degree of freedom in deciding on one’s pension assets. By making the second pillar optional in a three-pillar pension system, the first pension pillar will also change and the third pillar will be affected. The impact of the reform is long-lasting. Secondly, such reforms generally require a social and political agreement, which was not reached in the present case, and the reform act was subject to exceptional parliamentary scrutiny – the Government of the Republic decided to link the adoption of the Act Amending the Funded Pension Act to a matter of confidence before the second reading. Thirdly, the reform act has far-reaching and precisely unpredictable impacts. One thing is clear – with the freedom to decide on the money to be collected, the individual will have more responsibility, including more complicated legal relations in dealing with the risk of old age and investing property. In the context of the subject of this yearbook, the protection of personal data, it is important that the new legal relationship between individuals following the pension reform also highlights the importance of composition and protection of pension data, as these will be of great value in proving one’s pension rights in the future.
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[1] § 1 clause 67 of the Act Amending KoPS supplemented the Funded Pensions Act with § 43¹, which gave persons who are not yet entitled to a mandatory funded pension the right to demand redemption of all units of a mandatory pension fund and payment of the corresponding amount and the money in all pension investment accounts. By § 1 120) of the Act Amending KoPS, KoPS was supplemented with § 72⁴, which enabled the policyholder to cancel the pension contract entered into before 1 January 2021 and receive money in the surrender value of the pension contract.
[2] Hannes Sarv. There are over 100 000 people wishing to leave the second pension pillar, 1 March 2021. – Online: https://www.err.ee/1608127078/teisest-pensionisambast-lahkuda-soovijaid-on-ule-100-000.
[3] RKÜKo 20 October 2020, 5-20-3/43, pp. 142–143.
[4] Dissenting opinion of the justices of the Supreme Court – Peeter Jerofejev, Kai Kullerkupp, Kaupo Paal, Nele Parrest, Ivo Pilving, Kalev Saar and Juhan Sarv in case no. 5-20-3 (RKÜKa, 20 October 2020, 5-20-3/46).
[5] RKPJKo 20 December 2016, 3-4-1-3-16, articles 87–88.
[6] RKÜKa 20 October 2020, 5-20-3/46, articles 3, 9–20.
[7] RKÜKo 20.10.2020, 5-20-3/43, articles 54.2–54.3.
[8] See for details RKPJKo 05.05.2020, 5-20-1/15, article 20; RKÜKo 26.06.2014, 3-4-1-1-14, article 127; RKÜKo 07.06.2011, 3-4-1-12-10, article 58; RKPJKo 21.01.2004, 3-4-1-7-03, articles 15 and 16; RKHKo 10.11.2003, 3-3-1-65-03, article 14.
[9] See for details RKPJKo 05.05.2014, 3-4-1-67-13, article 31; RKPJKo 21.01.2004, 3-4-1-7-03, article 16; RKHKo 10.11.2003, 3-3-1-65-03, article 14.
[10] See for details RKÜKo 26.06.2014, 3-4-1-1-14, article 127; RKPJKo 21.01.2004, 3-4-1-7-03, article 14; RKÜKo 07.06.2011, 3-4-1-12-10, article 58; RKHKo 10.11.2003, 3-3-1-65-03, article 14.
[11] RKPJKo 05.05.2014, 3-4-1-67-13, article 49.
[12] See for more details RKPJKo 09.12.2019, 5-18-7/8, article 119; RKPJKo 05.05.2014, 3-4-1-67-13, article 49; RKPJKo 21.01.2004, 3-4-1-7-03, article 14; RKHKo 10.11.2003, 3-3-1-65-03, article 13.
[13] A. Henberg. The Constitution of the Republic of Estonia. Executive edition 2020, § 28 comments, article 11.
[14] “The extensive decision-making freedom of the Riigikogu in the field of fundamental social rights does not mean that the legislator, as the shaper of the state’s economic and social policy, is completely free to decide to what extent and to whom the social rights provided in § 28 of the Constitution are guaranteed by using the argument of limited resources. By making the social policy choices, the legislator is bound by the nature of the principles of the Constitution and fundamental rights. The right to receive assistance from the state in case of need is a subjective right, in case of violation of which the person has the right to take legal action and the court has an obligation to verify the constitutionality of a law granting social rights.”(See for more details RKPJKo 21.01.2004, 3-4-1-7-03 article 16 ); “The right to state assistance in case of need gives a person the right to demand in case of need and obliges the state to provide assistance that would provide the person with the minimum necessary means of subsistence. The situation where a person does not have the minimum resources necessary for subsistence should be therefore understood as the need within the meaning of the Constitution.” (For more details, see RKPJKo 05.05.2020, 5-20-1 / 15, articles 18-19).
[15] RKÜKo 20.10.2020, 5-20-3/43, articles 30–34 and 40–41.
[16] Ibid / Same, article 46.
[17] Ibid / Same, articles 50 ja 51.
[18] A. Henberg. The Constitution of the Republic of Estonia. Executive edition 2020, § 28 comments, article 13.
[19] RKÜKo 20 October 2020, 5-20-3/43, articles 47–54.3.
[20] A. Henberg. The Constitution of the Republic of Estonia. Executive edition 2020, § 28 comments, article 15.
[21] Cf / Vrd RKPJKo 05.05.2020, 5-20-1/15, article 22.
[22] See RKPJK 21 January 2004, 3-4-1-7-03, article 16 and 5 May 2020, 5-20-1/15, article 23, RKÜKo 20 October 2020, 5-20-3/43, articles 42–46.
[23] RKÜKo 20 October 2020, 5-20-3/43, article 52.
[24] Ibid / Same, articles 66–69.
[25] Cf RKÜKo 15 December 2015, 3-2-1-71-14, article 117.
[26] RKÜKo 20.10.2020, 5-20-3/43, articles 74–88.
[27] RKÜKa, 20.10.2020, 5-20-3/46, articles 1–3 and 11–20.
[28] Ibid / Same, articles 4 and 39–45.