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Lithuania overrides veto on contribution cut

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  • Lithuania overrides veto on contribution cut

LITHUANIA - The Lithuanian parliament, the Seimas, has overruled a presidential veto of a law that cuts contributions to second pillar pension funds to 3% of a salary from the 5.5% to be paid in 2009 and 2010.

The cuts will be backdated to the beginning of the year.

The pension contributions cut was included in a package of measures passed in late December by a four-party conservative-led coalition government that took office in November after the October 2008 general election.

The government’s economic crisis plan is intended to save LTL5.3bn (€1.53bn) to offset a 2009 budget deficit of LTL1bn, or 4% of GDP. The package included raising taxes and cutting budget expenditure to shore up the budget as revenues fall.

Under the 2003 pension reforms, 18% of employees’ gross salaries are paid into the pay-as-you-go State Social Insurance Office (SoDra). Those who opt to join the privately-funded system can divert 5.5 percentage points of their SoDra contribution into a private pension fund of their choice.

The reduction of the contribution level is intended to reduce the outflow from SoDra by LTL600m and so assist the public finances.

“On the basis that an average salary in Lithuania is LTL2,000, each pension fund participant will lose LTL1,200 in contributions during the two-year period and will gain a monthly state pension increase of LTL5.4,” said Jonas Irzikevicius, managing director of SEB Investiciju valdymas, one of Lithuania’s largest pension fund managing companies.

“So without taking into account any investment performance one would have to be a pensioner for more than 100 years to get back these lost funds,” he added.

After being passed by the Seimas the measure was vetoed by President Valdas Adamkus. Legislation requires a presidential signature to become law, unless the Seimas overrules a veto by a majority in the 141-seat chamber or a vote of not less than three-fifths if the issue is deemed constitutional.

In the event, the government overturned the veto by 85 votes to 20 against with 10 abstentions.

Vetoing the law, Adamkus said cutting the amount transferred to private pension funds did not comply with state commitments.

“Those who decide to accumulate part of the SoDra payment in private pension companies have a right and a legal expectation to demand that the commitment to pay certain amounts undertaken by the state be implemented or that they be compensated for losses resulting from changes in regulations,” he said.

Vilija Blinkeviciute, an opposition member of Seimas’ social affairs and labour committee and a former social affairs and labour minister, supported the veto. She claimed in 2004 the Lithuanian people supported the pension reform and believed they had a right to voluntarily participate in a pensions accumulation system.

“We will be affected by lower revenues, of course, and will have to focus on efficiency and costs,” said Irzikevicius. “However, we are looking to co-operate with the government to find a source of long-term funding of the Lithuanian pension reform.”

Although the reform law set the initial contribution level at 2.5% of a salary, rising by an annual 1% of a salary to 5.5% by 2007, it has been open to change each year when the Seimas votes the SoDra budget.

“The fact that each year the Seimas discusses and defines the level of contributions to private pension funds does not ensure the stability and consistency of the reform,” Irzikevicius added. “We have to find a long-term funding method that is acceptable for both the pensions fund members and the pension fund managers.”

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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