The Lithuanian regulator is preparing changes to second-pillar pension legislation that will limit people’s options to change risk profiles within their life-cycle choices.
Currently, the 21 pension funds in the country’s second pillar can offer four pre-defined risk categories with 100%, 70%, 30% or 0% equity exposure.
All participants have free choice, and people beyond the age of 55 are advised to choose the fund with the least risk.
However, Darius Kuzmickas, general manager at Danske Capital in Lithuania, the country’s smallest pension fund, noted that “22% of second-pillar participants save in funds with risk that does not correspond with their age”.
In times of higher market volatility, 5-7% of participants are changing their risk profile, he added in his presentation at Fleming’s CEE Pension Conference in Prague.
“The regulator thinks people should not be allowed to switch risk profiles this easily and argues this is threatening the system,” Kuzmickas said.
The regulator has now prepared a paper for legal changes that would introduce a “default investment strategy” based on a target-date life-cycle model, where separate funds for each retirement year must be set up where equity exposure is cut each year.
This means the current multi-fund approach – by which each provider offers various funds with different risk profiles from which people can choose – would have to be overhauled.
Kuzmickas fears the overhaul, apart from increasing costs, will shake people’s trust in the system.
He pointed out that, in 2013, when people were first given a choice to make their own contributions to the funds, approximately half of participants did put their own money into the second pillar, which is otherwise financed from the state’s social security fund.
“If the regulator’s plan is approved, it will mean the risk in people’s portfolios is adjusted automatically, and this will not help people to learn about their pension investments or make decisions,” Kuzmickas said.
Although he acknowledged that introducing a default investment strategy to the life-cycle model could improve the second pillar, he thinks it could be done within the framework of the existing funds.
According to his calculations, multi-fund and target-date approaches in a life-cycle model almost yield the same results for pensioners.
“Further research and a transparent cost/benefit risk analysis are needed before any changes are made,” he said.