26 November 2012

IPE: Lithuanian parliament approves long-awaited pension reforms

The Lithuanian Parliament (Seimas) has passed a package of laws intended to reform the pensions system, with some reforms being first signalled by the government more than a year ago.

Although October's elections resulted in a change of the parliamentary majority to a centre-left coalition, with a new government formed accordingly, the outgoing parliament approved the reforms in the final days of its term of office.

The new rules include allowing pension fund members to make additional contributions, to be topped up by the government. At present, employees who choose to make second-pillar provisions get a percentage of their social tax contributions redirected into a personal account with their chosen private pension fund, instead of paying the full amount into the pay-as-you-go system (SODRA).

The new laws provide for contributions to then go down to 2 per cent of salary in 2014, but allow an additional 1 per cent as an optional payment from a member's after-tax salary income. This would be boosted by a government subsidy equal to 1 per cent of the statistical average national salary.

Marijus Kalesinskas, chairman of the board of the Lithuanian Pension Fund Members Association (LPFMA), said: "These new legal amendments are marginally beneficial for second-pillar pension fund members, especially to those earning salaries close to or lower than average – mainly because they provide more choice and offer some incentives". "On the other hand, they make the pension system even more complicated and hard to understand for the average member – and indeed mix up the principles of the existing second and third pillars into one."

Other proposals include reducing the maximum fees that can be charged by pension fund management companies from their current level of 1 per cent a year on assets under management, to 0.65 per cent for the conservative (government bond only) pension funds after 2013.

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