To be completely clear, I personally think the third pillar is an absolute failure and is essentially the state subsidizing banks that are burning money doing absolutely unreasonable things in terms of fund management. (You might notice that I’m quite disappointed at how badly the system currently works.)
This is obvious from the following statistic:
- S&P 500 over the last 5 years – +87% (the annualized numbers are impressive as well)
- Best 3rd pillar fund over the last 5 years is barely touching 9% annualized
Third pillar idea in theory
On paper the idea of the third pillar looks great. You can set aside up to 15% of your gross income (tax-free), so that’s an automatic return of 20% on the money invested. Seems amazing, right?
In theory the third pillar could be an amazing way to motivate people to save up for their future. 15% saved on top of the 1st pillar that comes from the state + the 6% that you get from the second pillar is likely to help you quite a bit in retirement.
Third pillar in action
If you look at the returns on the third pillar for an average citizen then the situation is less drastic than when looking at the funds benchmarked against indexes. The reason for this is the fact that the contributions get put in tax-free and people don’t personally get a feel for the amount of money that the state loses through this.
What this means in reality is that the state is subsidizing banks that are literally burning money. People get OK returns, but this isn’t because of how well the market is doing (and we’ve had three solid years of an absolute bear market which could have made incredible returns even with a relatively conservative strategy). People get returns because the state is “absorbing” a huge amount of the losses that bad fund management is causing.
My personal opinion
As the third pillar is right now, I wouldn’t go anywhere near it. In addition to the way the system works overall, the way you can start cashing out is complicated enough that I don’t see the point.
I think the idea of allowing such a huge amount of tax-free contributions is great. However right now the main benefactors are banks and the biggest loser is the state.
If the third pillar allowed better choices (as with the second pillar, I’d be super happy with just an ordinary index of some sort as opposed to active management) I’d consider it. Right now, however, I see no reason to give away such a huge amount of money for terrible fund management.
I understand that the third pillar would otherwise be a great idea for people who lack incentive to invest otherwise (in some ways it is a relatively safe way to invest). However, as I’m more than OK with making active reasonable choices the third pillar will get little support from me as it is right now.