LATVIA - Contributions to the Latvian mandatory second pillar will remain at 2% for 2010 and then increase to 4% next year, reaching 6% in 2012.

Last year, the Latvian government decided to slash the contribution rate from 8% to 2% in order to divert more money back into the first pillar system.

“We made a mistake in aiming to increase the contribution rate to 10%,” Jana Muizniece of the Latvian ministry of social affairs told delegates at the AEIP conference in Vienna yesterday.

“The financial crisis showed it is not possible to give such a large part of social contributions to the second pillar,” she added.

Latvian funds returned -21.8% in 2008 but recovered in 2009 with an average performance of 11.9%.

Assets have now reached LVL756m (€1bn), which is around 5.4% of GDP, with the system covering 78% of the working population as joining remains voluntary for certain groups of people until the end of the transition period in 2034.

In order to cut budgetary pension expenditure, which currently stands at 7.1% of GDP, Latvia aims to reduce early retirement. The actual average retirement age is just under 61 compared with a statutory retirement age of 62, which will also be increased. (See earlier IPE article: IMF calls on Latvia and San Marino to do more on pensions

Indexation on pensions will also remain frozen this year.