LITHUANIA - Pre-negotiation talks are underway in Vilnius between second pillar pension fund providers and authorities who are demanding providers reduce their fees.
The ministry of social affairs and the security exchange commission have proposed providers, from both pension fund management companies and insurance companies, reduce the loan fees and management fees charged on conservative funds.
Pension providers, represented in the talks by the investment management companies association and the life insurance association, are unhappy the authorities want to change the rules of the game when the system has been working for such a short time.
Under Lithuanian legislation, all second pillar pension providers are required to offer a conservative fund, with assets allocated solely to government bonds of EU and OECD countries. They can also offer additional funds with varying allocations to equities and degrees of risk.
"The background to the authorities' demand is that people who have started to leave the system are receiving less money than has been paid in," said Jonas Irzikevicius, general manager of SEB VB Asset Management, Lithuania's second-largest asset management company.
Pension funds deduct a one-off loan fee of, on average, 2% and an annual management fee of approximately 1% of the assets under management.
Unlike elsewhere in the region, Lithuanian legislation set no upper age limit for participants in pension funds and consequently, there are already retirees taking money from the providers.
"After three years some clients received less than the transferred amount after these fees were deducted," said Irzikevicius.
"We have explained that this was due to the unfavourable market conditions for fixed income funds. Conservative funds are invested solely in government bonds and the interest rate environment over the last three years has made it impossible to generate high returns. Even so, most of the fund's managed to outperform their benchmark," he continued.
However, authorities have suggested the problem would be eliminated if the management companies lowered the loan fee and the management fee.
"If we just reduce the management fee charged on the conservative funds to 0.5% of the total related cost, which in SEB VB's case is approximately 35 bps, it means that there are only 15 bps for the manager," said Irzikevicius.
"We think a better approach would be to allow a little more risk in the conservative funds such as giving the possibility of investing in some corporate bonds to enhance their performance. And a more efficient way of decreasing fees would be through competition in the market, by permitting each pension company to decide its own fee level based on the competitive environment," he added.