VILNIUS GEDIMINAS TECHNICAL UNIVERSITY
BUSINESS MANAGEMENT FACULTY
DEPARTMENT OF ENTERPRISE ECONOMICS AND BUSINESS MANAGEMENT
PENSION FUNDS IN LITHUANIA AND ABROAD:
PEOPLE PARTICIPATION
Made by: VV-2 gr. A.Baloban
Checked by: Doc. M.Tvaronavičienė
Vilnius
2004
CONTENT
INTRODUCTION 3
PART 1 4
PENSION REFORM AND FUNDS 4
What is the Pension system reform in principle 4
The key goals of the pension reform are: 5
Structure of pension funds 6
Safety of savings 8
Switching to another saving enterprise 9
How to join Pension fund? 9
Vilnius bank pension funds 10
Hansa bank pension funds: Lithuania 12
Hansa bank pension funds: Latvia 14
Hansa bank pension funds: Estonia 16
PART 2 19
STATISTICS AND COMPARISON 19
PART 3 22
Consideration of pension funds 22
CONCLUSION 24
REFERENCES 27
INTRODUCTION
The social security system in Lithuania is comprised of the social insurance system, the medical insurance system and the social support system. The most significant components of the State social security system are the social insurance system (including pension insurance) and the medical insurance system. Though the 30 June 1999 Law on Pension Funds came into effect on 1 January 2000 already, private pension funds do not actually function yet. At present, all employees are insured on a mandatory basis, but the reformed pension system started functioning from 1 January 2004. Employers (i.e. Lithuanian economic entities or individuals that pay wages to employees) are required by the law to pay or withhold contributions in full on behalf of their employees. Additionally, the law also provides for voluntary social insurance.
Debates on pension reform started in Lithuania back in 1994. Today we have 2004, but the debates are still going on. One may conclude that Lithuania, being on the periphery of these worldwide developments, has not realized yet the magnitude of problems that the pension system is causing. Or, one may say, the difficulties that the reform will pose are understood much better than today’s problems.
Naturally, every reform requires a great deal of resources – ideas, people and money – to change what has been normal, familiar and customary for many years. In every system, regardless of the degree of its usefulness to the society, there are people who are content with status quo and do not want any change.
Of course, the lot of reformers is not something to be jealous of. But it is the mission of politicians to create a legal environment or to change it so that people could create prosperity today, tomorrow and for many years to come.
PART 1
PENSION REFORM AND FUNDS
What is the Pension system reform in principle? The reform of the pension system implies a gradual transition from the current pension system based on redistributive principles to a system based on savings.
In Lithuania at the present, all social insurance taxes collected by the State Social Insurance Board of Lithuania (SODRA) are being immediately redistributed through pensions and other means of social support.
This implies that currently employed persons are supporting current retirees and other recipients of social support. With the establishment of saving funds, each person will be able to save part of the pension in the personal account, opened in a pension fund or in a life insurance company of his or her own choice.
One of the key features of the reform is the opening up of the possibility for each person, insured by the compulsory state insurance, to freely choose to save part of the pension in the personal account at the pension fund or life insurance company of his or her own choice.The pension reform will proceed without altering the nature or size of the current social contributions. From the current social insurance contribution – 34 percent of earnings, 25 percent are allocated to the pension system.
With the establishment of the saving system, it would be allocated 5.5 percent (2004 m. -2.5 %., 2005m. – 3.5 %., 2006 m. – 4.5 %. And from 2007 m. onwards – 5.5 %.), while the existing current contribution-support system would receive 19.5 percent. The employers will continue to transfer the same contributions as they do now, and SODRA will transfer the necessary amount to the personal accounts in the pension saving funds.
The persons taking part in the saving plan, will then be the recipients of a pension from two sources – SODRA and pension saving funds.
The current contribution-payments social insurance pension system, designed in 1992-1994, has carried and continues to carry out an import mission.
However, supplementing the current pension system with pension saving funds would help solving problems of demographic nature (decreasing birth rate, ageing society), would make it more attractive to young persons, and would strengthen the mutual linkage between the social insurance contributions and the social support payments.
The key goals of the pension reform are:
1. To create the conditions for the insured persons to receive larger pensions.
2. To decrease the effect of an ageing society on the pension system.
3. To
gradually decrease the rate of contributions for the pension insurance and thus lower the cost of labour force.
4. To strengthen the capital market and thus encourage the growth of Lithuanian economy.
Structure of pension funds
The pension system would entail three levels, each financed and governed in a different manner.
I current pension financing level. This level would ensure the basic protection against poverty in the old age, or in case of an illness. It would be financed based on the currently existing principles – relying on the current contributions.
II level – saving in private pension funds and insurance companies.
III level – voluntary saving for the retirement in pension funds and insurance companies.
For the persons who decide not to participate in the pension saving (the pension reform is voluntary), the pensions will be calculated according to the currently existing procedures.
For those who select to participate in the pension funds, the pension will be calculated in a different manner based on different periods:
– for the period prior to joining the pension fund, the pension will be calculated entirely by SODRA;
– after joining the pension fund, the pension will be calculated in proportion to lower contribution, with a person receiving additional payments from the pension fund.
Benefits of joining Pension fund
The key advantage of a voluntary pension saving is that the current nature and the size of the contribution will not be altered. The current size of the social insurance contribution is 34 percent of all earnings, 25 percent of which are allocated to the pension system.
If a person selects to participate in the voluntary pension saving, he /she would be allocated 5.5 percent (2004 m. -2.5 %., 2005m. – 3.5 %., 2006 m. – 4.5 %. And from 2007 m. onwards – 5.5 %.), while the current system of contributions-payments would receive 19.5 percent.
If a person selects to participate in the voluntary pension saving, her employer will continue to transfer the same contribution to SODRA as he / she does now. SODRA will then transfer the necessary amount to the personal account in the pension saving fund.
Consequently, a person participating in the pension saving, will be a recipient of a pension from two sources – SODRA and a private pension saving fund of his /her choice. All of those selecting pension saving, will be entitled to the following payments: one-time-only (when the amount saved is small), periodical payment, and an annuity (to be paid for the lifetime). Annuity will only be paid by the life insurance companies – a person can choose a company and conclude with it a contract, which specifies an annuity to be paid.
All other payments will be issued by the insurance companies and by the pension funds. If a person is deceased prior to his /her retirement age, the amount saved (and the interest accumulated) will be inherited. (In case of a death of a retiree, who concluded an annuity-paying life insurance contract, the savings are not subject to inheritance).
The size of contribution
During the first years of the reform, a contribution for the savings insurance would equal 2.5 percent, the same percentage that an insured person is paying at the present.
The rate of the savings contribution would gradually increase by 1 percent annually until it reached 5.5 in the year 2007.
The general rate of the social insurance contribution would not go up. At the present, the pension insurance is allocated 25% of all the contributions collected by SODRA.
If a person chooses level II, this amount will simply be split into two parts: one will be devoted to savings, and the other, as previously, will remain in SODRA.
If a person decides upon a bigger size of pension, he / she will be able to contribute the additional amount to a pension fund or an insurance company of his /her choice.
Safety of savings
Seeking to ensure the safety of the companies undertaking savings operations, the state will provide strict guidelines to such companies.
First of all, apart from the requirement of start-up capital, there will be requirements concerning impeccable reputation of the employees and, particularly, of managers for the establishment of such enterprises. The activities of such enterprises will be strictly licensed and monitored by the competent state institutions.
To ensure the business transparency of these enterprises, they will have to provide public business activity and financial status reports.
The savings enterprises, while investing pension savings, will have to adhere to the appropriate investment requirements: for example, an enterprise will not be able to invest all of its wealth into securities, and especially, into the securities of any one specific enterprise. The so-called investment portfolio will have to be spread into various instruments of financial market – obligations, securities, bank deposits and so on.
In the event of the enterprise’s liquidation, third-party credit claims will not be satisfied at the expense of pension savings, since these assets are accounted for separately from the rest of the assets owned by such an enterprise.
Saving enterprises will be required to annually undergo an audit carried out by independent audit companies; also, such enterprises will be required to annually inform their clients about the size of his / her pension savings, held in the personal account.
Each pension fund and life
company will be required to form guarantee reserves to ensure relative revenue balance (the average revenue for all of the country’s funds counted).
Switching to another saving enterprise
Persons, willing to switch to another pension fund will be able to do so; however, a restriction for switching will be set for the first three years.
For persons who will be moving abroad and working there until the retirement, the part of the pension calculated at SODRA will be transferred to the country where the pension will be paid, and added to the pension earned in that country.
Assets accumulated in the pension fund, will be held the private property of that person and paid to him /her upon reaching the retirement age irrespective of the migration rules of the EU.