EUROPE - Lithuania's pension fund association has sued the government in the constitutional court after lawmakers reduced contributions to the private pension systems to offset budget deficits.

Several members in the association have filed individual suits, and the association has filed a class-action suit on behalf of the 1m members in the private pension system.

The suits allege the government failed to fulfil the requirements of the pension reform legislation.

In June this year, the parliament decided the contribution level would remain at 2% beyond the end of 2010, which was the original period, as the country expects to save more than LTL600m (€174m) per year.

This summer, some MPs suggested cutting contributions completely, but this did not carry. At the same time, amendments to the pension system reform law were adopted promising to resume the contributions when the economic situation in the country improved.

Because of the lack of explicit dates or definitions of when the situations would be deemed sufficiently improved, the pension fund association argued that the way the contribution issue was handled was unjust, unconstitutional and possibly illegal.

The association has calculated that, to the beginning of November, the government had failed to transfer LTL850m.

The organisation also argues the government could have borrowed the money from the pension funds, which then would have had the certainty of knowing how and when the money would be paid back.

The suits demand compensation for the seizure of contributions participants paid in the expectation they would be transferred to their private personal pension accounts.

Meanwhile, Latvia's welfare ministry has said contribution levels to the second-pillar private pensions system for 2011-12 will be reduced to 2% from 4%.

The country finds itself in a similar financial situation as its Baltic neighbours following the financial crisis, and like Estonia and Lithuania, Latvia has resorted to cutting its contribution levels to the second pillar.

The government said latest cuts - which will prolong austerity measures in the country for longer than first expected - would help reduce the state social insurance budget deficit and provide full state social insurance services.

The cut will add LVL44.9m (€63.3m) and LVL114.6m for the 2011 and 2012 state social insurance budgets.

For the reductions in pension contributions to become law, the ministry has proposed amendments to the country's state-funded pensions law. The amendments have yet to be approved by the parliament.

By reducing the rate of contributions in the second pillar pensions, the rate of contributions in the first pillar, or state pension, will increase correspondingly and apply to people not yet granted retirement pension. From 2013, a contribution rate of 6% will be introduced.

Lastly, the Estonian second pillar pension system now boasts more than €1bn in assets.

Out of a population of 1.3m, more than 606,000 people participate and have amassed €1.04m in the system, as at 31 October.

The second-pillar funds generally offer four investment strategies: a lower-risk (or conservative) fund that only invests in fixed income, a medium-risk (or balanced) fund that can invest as much as 25% in equities, a higher-risk (or progressive) fund that may invest as much as 50% in equities and, recently, an even more higher-risk (or aggressive) fund that can invest as much as 75% in equities.

Under draft legislation, participants in the second pillar system will be allowed to switch providers as many as three times a year, as opposed to just once under current legislation. If passed, the legislation will come into force in April 2011.

The Estonian government has responded to the budgetary impact of the financial crises by suspending its contributions to the second pillar for two years from 1 June 2009.

It plans to start paying 2% from June 2011, while citizens will pay 1%, and full contributions from both sides will be restored from 2012.

However, if the economy rebounds, the government has promised to pay 6% over 2014-17 for those who continue to contribute to their second pillar pensions.