Introductory speech at the Workshop on insurance and private pensions in the Baltic States
Tallinn, 6-7 February, 2002

Andres Sutt

Ladies and Gentlemen,

I Main forecast: prerequisites and key indicators

On behalf of the Bank of Estonia, I would like to welcome you all here in Tallinn to join the Workshop on Insurance and Private Pensions in the Baltic Countries. For a central banker a pension reform represents a double-interest - properly designed pension scheme is a sine qua non to ensure the long-term sustainability of public finances and; hence, overall macroeconomic stability. It is also important for broadening and deepening the financial markets and; thus, facilitating the financial intermediation. Efficient supervision plays a critical role here too. These are complex issues indeed. Therefore, I believe this is one of the many areas, where the international co-operation and sharing of experience is of great advantage and helps countries to minimise the costs and maximise the benefits of the reforms.

Fiscal implications

Let me turn first to the fiscal implications associated with a pension scheme. Like majority of developed nations, Estonia is facing the problem of ageing population. Demographic developments have necessitated the establishment of a modern and financially solvent pension system. This has been a major challenge. The introduction of the new funded pillars has also a central task in communicating the benefits and objectives of the system to the public in order to build up confidence and encourage people to think of and save for their retirement.

The current framework for the second and the third pillar of the pension system has been set out in the Funded Pensions Act from September 2001. Indeed, a sound pension system needs, after all, clear rules for the first pillar, the pay-as-you-go system. The Bank of Estonia has always stressed the importance of the high-quality framework for the first pillar, as this has the most explicit risks involved for the government finances. The second and third pillars are important as they provide the public finances with a long-term strength and, most important of all other objectives, guarantee the current workforce with a reasonable old-age income, the pension.

The Development of Financial Markets

As a second issue of interest for a central banker I would like to address now the development of financial markets. Considering the focus of the current workshop, the Bank of Estonia has its own interests in the topics offered for discussions during these two days. One of the core objectives of a central bank is always the stability and the integrity of financial markets. I am sure this workshop will add new thoughts to the current discussions about the insurance and pension issues in the Estonian financial market, and in the Baltic financial markets at large.

As for Estonian financial sector, although largely bank-dominated, it does encompass all main financial activities - banking, leasing, insurance, fund management and stock market operations. The diversity of the financial sector enables to offer a wider range of financial products to the public. It also helps to diversify risks. The universal banking model prevalent in Estonia makes financial conglomerates major suppliers of different financial services. Highly integrated financial services market calls for a well-designed and comprehensive safety net.

Moreover, it is important to note that we not only have a highly integrated domestic financial market. Our financial markets are ever more integrated with the European, and particularly the Nordic, financial markets. A deep restructuring process has changed the domestic financial market into an attractive and developing one, where the foreign participation contributes to the system's credibility. Of course, the same can be said about all the Baltic countries.

The further development of the Estonian financial sector is clearly directed towards an increasing share of investment activities. Ageing population and improved capacity to save increases the demand for saving and investment products. It is self-evident that the established three-pillar pension system has a central role to play here.

Financial stability issues

This leads me to financial stability issues. As the second and third pillars are based on individuals' own savings, it definitely necessitates a carefully planned infrastructure and proper financial safety measures to gain credibility among current workers. For the third voluntary pillar the regulators' efforts shall be addressed to enhancing and facilitating development and deepness of financial markets. But also the second, mandatory pillar deserves the authorities', such as the Financial Supervision Authority and the central bank, continued attention and wide-ranging responsibility.

Focusing on the pension reform, it would therefore be inappropriate to skip the systemic stability and supervisory issues. The latest and a very important development for Estonian financial markets has been the foundation of a single financial market regulator - the Estonian Financial Supervision Authority. The EFSA works in a close co-operation and is administratively affiliated with the Bank of Estonia. This institutional set-up enhances the efficiency of measures for financial stability by bringing together micro-level supervision on the one hand and macro-prudential systemic stability monitoring and assessment on the other.

It has to be stressed that the EFSA has a full operational independence. It has all the necessary power to take appropriate actions towards market participants. At the same time, the central bank, being responsible for systemic stability, will maintain very close analytical and policy contact with the EFSA.

As a legal successor of former financial sector supervision authorities, the EFSA will continue to perform international co-operation according to the existing international agreements of the three supervision authorities. Of course, the economy being so open, it is ever more important to work towards closer co-operation between the EFSA and its peers as well as international organisations, in order to participate in policy discussions at the international level.

Co-operation with international organisations

International co-operation is the last subject I would like to address here today. Indeed, the current workshop is an excellent example of collaboration between the Estonian authorities and an international organisation, the OECD. For Estonia the co-operation with international community has been a constant priority. In this perspective the work with the OECD has concentrated to the areas - like the one to be discussed today - where the OECD could most effectively contribute to Estonia's efforts to integrate itself into the world economy. For Estonia, it becomes increasingly evident that the co-operation in and with the OECD workgroups on several policy areas, such as the Committee on Financial Markets, the Financial Action Task Force and the Committee on Capital Movement and Invisible Transactions, would help us to reach our strategic development goals.

For the Baltic countries the active participation in the Baltic Regional Programme is a way to be accepted as equal members into the family of industrial countries. The value of such programmes is clearly evident. Therefore, we appreciate highly the donor countries' support to the Programme. At the same time, as Estonia wishes to demonstrate its commitment to the chosen course, the authorities have also made efforts to speed up the self-financing of the Programme and have done it since 1999. We wish to continue contributing to the Programme activities also in the future.

Let me stop here and wish you all fruitful and lively discussions in upcoming sessions.

Thank you for your attention.