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Lithuanian pension funds 'surprised' by contribution increases

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Lithuania’s new second-pillar pension system has suffered relatively few defections, while a significant number of participants has proved willing to make extra contributions.

In the existing second-pillar system, which is voluntary in Lithuania, members pay a base contribution – of 2.5% in 2013 – from gross wages.

Under the new system, from 2014, the base rate falls to 2%, and existing fund members can make a further 1% in contributions, matched by a state subsidy of 1% of gross average wages.

These additional contribution rates rise to 2% apiece in 2016-19.

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Workers who joined the second pillar in 2013 will have to make the additional contributions.

Existing fund members had until 30 November to choose whether to make the additional contribution, opt out or just continue paying the base rate.

The latter was also the default position for those who failed to make a notification.

According to SoDra, the social insurance fund, the number of second-pillar participants willing to pay the additional contribution totalled 385,900 (35%) as of the end of November, including 52,500 new workforce entrants, while only 22,000 (2%) have opted out.

Mindaugas Gedeikis, chairman of the Lithuanian Pension Funds Members Association, said: “We are somewhat positively surprised people opted for making additional contributions to the funded system more actively than we expected.

“We initially anticipated that only some 10-20% of the pension funds’ members would choose to commit making additional contributions on top of the social taxes they have to pay.”

According to Gedeikis, the factors that contributed to these decisions included the government subsidy, an active public debate and an official web-based calculator allowing individuals to estimate the impact of their choice on their pensions savings.

“The most important reason that a vast part of the population chose to increase contributions to the funded pension system was the growing awareness of the public of the problems of the PAYG system in the face of demographic trends and populist political decisions that are major cause of the growing debt in the social budget,” he added.

The high overall participation in the voluntary second pillar – some 85% of the working population – alongside the tiny share of opt-outs this year, sends a strong signal to the current centre-left government, which inherited and then passed the draft legislation from its centre-right predecessor in 2012.

Prime minister Algirdas Butkevičius has stated that the government will not be abolishing the second pillar, but would look at revisions and improvements next year.

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