Pension accumulation for employees in pension funds is a means companies all around the world often use to foster employee loyalty. It’s a way not just to ensure a bigger pension in old age, but also to motivate those who work best.
A full 50% of Lithuanian residents would be motivated by employer contributions to a supplementary voluntary pension accumulation (3rd pillar) pension fund, according to a representative survey. Some companies in Lithuania already use this type of incentive, thus demonstrating concern not just for their employees’ present, but also for their future.
A long-term and practical incentive
This type of employee incentive enables long-term motivation, since a contribution an employer makes to a pension fund adds to the employee’s accumulating supplementary pension. It’s also a practical way for companies to motivate employees.
Calculations show that, allocating the same amount of money for an employee incentive and considering all the costs, a pension fund contribution counting from 2019 could be as much as 68% bigger than the after-tax amount of a salary bonus. That’s because a pension contribution, unlike a bonus, isn’t taxed as long as it doesn’t exceed a quarter of the employee’s pre-tax salary for the year.
* The advantage arises because taxes levied when paying a wage bonus are not levied on pension fund contributions. These tax benefits apply when pension fund contributions do not exceed 25% of an employee’s pretax employment-related income. Calculations assume no tax exempt amount ("NPD"). The calculations are based on the taxes, which came into force from 2019.
If an employer makes contributions to an employee’s chosen 3rd pillar pension fund and they do not exceed 25% of the employee’s annual employment-related income, according to the taxes system, which is in force until 2019, the employer is not required to pay the social security tax on that amount (31.18%) while the employee does not have to pay the personal income tax (15%) or the health and pension social insurance contributions (which total 9%). From 2019, if an employer makes contributions to an employee’s pension fund, these contributions are exempt from the following taxes: personal income tax (20%), employer’s social insurance contribution (1.47%) and employee’s social insurance contribution (19.5%).
Thus contributing to a pension fund lets an employer allocate a much bigger incentive amount in terms of what they add to an employee’s supplementary pension accumulation
All employees are eligible
Under the existing pension accumulation system, all residents of the country can accumulate in 3rd pillar pension funds regardless of whether they accumulate in the 2nd pillar or have insured income. There are no limits for this pillar on the number of pension funds or accumulation companies, and it is the individual who decides on the size, frequency and periodicity of contributions and the number of chosen funds.
Accumulation in 3rd pillar funds is recommended in order to approach 80% of one’s previous income level during retirement, assuming accumulation in the 2nd pillar also.
If money is withdrawn from a 3rd pillar pension fund sooner than 5 years after the start of accumulation and before reaching the designated age, a 15% (from 2019 - 20 %) personal income tax applies. There are also fees that apply for accumulating in pension funds.
INVL loyalty programmes for employers
Companies can also transfer contributions into 3rd pillar pension accumulation accounts that their employees have already opened.
This allows companies to take advantage of tax benefits. In this case, INVL Asset Management and the company conclude a cooperation agreement foreseeing the size of contributions and their payment frequency. If the company runs into financial difficulties, contributions can be reduced, halted or delayed. Employees can also contribute to their pension accumulation accounts on their own.
Four pension accumulation approaches
Under the “DE Pension” German-model programme for promoting employee loyalty, the employer accumulates an equal amount for each employee.
Under the “SE Pension” Swedish-model programme for promoting employee loyalty, the employer accumulates a fixed percentage of each employee’s salary. The standard practice in Lithuania is for employees to contribute 2-4 per cent of an employee’s salary.
Under the “IS Pension” Icelandic-model programme for promoting employee loyalty, both the employer and the employee contribute to pension accumulation to ensure that the employee’s pension will be at least 80 per cent of his or her salary. Usually in this case the company pays a percentage of the salary (2 per cent) and later adds a supplementary contribution if employees themselves also accumulate (e.g., 1 per cent + 1 per cent, 2 per cent + 2 per cent, 3 per cent + 3 per cent). Thus the contributions to 3rd pillar pension funds may total as much as 8 per cent.
Under the “JP Pension” Japanese-model programme for promoting employee loyalty, the employer contributes a fixed sum or salary percentage for each employee. The size of the contribution increases proportionally as an employee’s length of service at the company increases.
The above-mentioned pension accumulation approaches can be combined or used to complement each other.
Benefit for employees:
- With their employer’s help, employees can boost their future income to ensure their quality of life in retirement. By additionally accumulating in 3rd pillar pension funds together with accumulations in 2nd pillar, it’s possible to achieve a pension that is 80 per cent or more of one’s salary;
- The accumulated money is the property of the participant;
- If an employee dies, family members inherit the accumulated assets.
INVL Asset Management’s help for companies wishing to contribute to their employees’ 3rd pillar pensions:
- Short presentations or seminars for company managers and employees about the benefits of 3rd pillar pension accumulation;
- Assistance in the preparation of an agreement;
- Preparation of pension contribution plans that reflect employees’ age, experience and length of employment.
How to open 3rd pillar pension fund accumulation agreement
We encourage you to invite your employees to conclude agreements with INVL Asset Management. After reviewing your employees’ financial situation, we’ll prepare a personal pension accumulation plan for each of them and help calculate the recommended contribution size. If you want to discuss these opportunities, call us at 8 700 55 959 or write to us at [email protected].
Occupational pension funds
Companies can also accumulate for employees in 3rd pillar pension funds establishing the occupational pension funds. In this case the company can itself select the fund manager and so play a role in managing the pension funds. Both when establishing occupational pension funds and when transferring contributions to employee accounts at private pension funds, companies can make use of personal income tax exemptions. According to calculations by INVL Asset Management, this can be relevant for companies with more than 2,000 employees.
How can an occupational pension fund be established?
- First, an occupational pension association should be established. Its founders are the employer or employers, their employees and independently working persons.
- The financing entities – the employers or independently working persons – commit to pay pension contributions.
- An occupational pension association can start activities only after receiving permission from the regulating institution.
- An occupational pension association can establish or end the activities of pension funds into which the financing entities commit to pay pension contributions.
The bodies of an occupational pension association are:
- The general meeting of members;
- A collegial body – the board;
The board together with the administrator appointed by the board:
- Establish or conclude the activities of pension funds;
- Regularly monitor the pension funds’ investment policy principles and, if needed, initiate changes to them;
- Select and conclude an agreement with a fund manager;
- Select a fund custodian (depository) and conclude an agreement on the custody of pension assets;
- Select an audit company.
An occupational pension association carries out pension accumulation activity in its pension funds in accord with the pension funds’ rules, which must specify:
- The rights and obligations of persons having a right to become beneficiaries of pension fund contributions (participants).
- The financing entities, their rights and obligations.
- Types of pension disbursements, payment methods, disbursement conditions, etc.
- The period after which a participant in an occupational pension association acquires the right to the pension funds may also be specified, but may not be less than 2 years after participation began.
- A participant of an occupational pension association may switch to another pension fund managed by the association or to another occupational pension association.
How are disbursements from occupational pension funds received?
- Participants may get pension disbursements 5 years prior to pension;
- Money accumulated in the pension fund can be inherited;
Pension disbursements can be paid in the following ways:
- By purchasing a pension annuity from a life-insurance company (mandatory if the disbursement is larger than half the size of the base pension).
- Through a lump-sum disbursement or periodic pension payments.
The establishment of occupational pension funds is regulated by the Law on the Accumulation of Occupational Pensions of the Republic of Lithuania (X-745).
For what type of organization or group is the creation of an occupational pension association relevant?
- For companies with more than 2,000 employees. In this case, an occupational pension association could be established by just the company itself, as the financing entity, and its employees.
For several companies or institutions and their employees. This is relevant in Lithuania, which has few companies with more than 2,000 employees but many spheres of activity that bring together larger numbers of employees. In this case, an occupation pension association could be established jointly by several companies and their employees, for example:
- Civil servants, teachers, police, etc.;
- Small and mid-size business representatives;
- Agricultural workers;
- People working or active in the field of culture, artists, actors.
Why are occupational pension funds beneficial for employers?
- They are an opportunity to motivate employees and contribute to ensuring their welfare after retirement.
- They are a way to encourage employee loyalty, dedication and productivity.
- They offer a chance to motivate employees while saving taxes.
- They can help to strengthen a company’s public image.
Why are occupational pension funds beneficial for employees?
- Accumulated money is the property of the participant.
- If an employee dies, family members inherit the accumulated assets.
- With their employer’s help, employees can boost their future income to ensure their quality of life in retirement.
INVL Asset Management’s help in developing an occupational pension accumulation service:
- Short presentations or seminars for interested parties regarding the establishment and benefits of occupational pension associations.
- Consulting and process management during the creation of an occupational pension association and pension funds.
- Professional pension asset management and investment services in accord with the occupational pension association’s chosen strategy.
The personal income tax exemption for companies accumulating for employees in pension funds
Contributions to occupational pension funds and 3rd pillar pension funds are not subject to any taxes if the legal requirements are met. According to Lithuania’s Law on Personal Income Tax (article 17 section 1 items 14-141), pension contributions paid by an employer on behalf of an employee into a pension account in a pension fund are regarded as untaxed income in kind, so long as during the tax period the contributions do not exceed 25 per cent of the employment compensation due to the employee for the period.
Following a 2010 change in the definition of ‘income in kind’, these contributions on behalf of employees are not subject to social insurance tax either (Law on Personal Income Tax article 2 section 15 item 9; Law on State Social Insurance article 11 section 1 item 19) and, at the same time, employers are granted a profit tax exemption (Law on Corporate Income Tax article 17 section 1; article 17 section 2 item 8).
If you have questions or want to know more about pension funds, call us at +370 700 55959 or write to us at [email protected].
- For more information about INVL Asset Management‘s pension fund investing strategies, review our pension fund rules.
- You ca access periodic fund reports and read fund reviews.
Links to useful facts and more information about pension accumulation activities:
- Law on the Accumulation of Occupational Pensions.
- Law on Personal Income Tax.
- Law on the Accumulation of Pensions.
- Law on Reform of the Pension System.
- Law Amending Articles 1, 2, 3, 4, 7 and 8 of the Law on Reform of the Pension System.
- Law on the Supplementary Voluntary Accumulation of Pensions.
- Ministry of Social Security and Labour information on the pension system.
- Bank of Lithuania official information about pension funds.
- UAB "INVL Asset Management“ important documents.
As a 3rd pillar pension fund participant, you will have to pay the fees specified in the rules of the selected pension fund. The money accumulated in a pension fund is invested on the basis of the investment strategy set out in the pension fund’s rules. In accumulating in pension funds, you assume the investment and investment-related risk. The value of a pension fund unit may both rise and fall. You may recover less than you invested. A pension fund’s past results do not guarantee the same results and profitability in the future. Results for a past period are not a reliable indicator of future results. When seven or fewer years remain before retirement, we recommend considering investing in a conservative investment pension fund (INVL STABILO III 58+ / INVL Stable).
Before making a decision to invest, you should individually or with the help of investment advisors assess all risks associated with investing and acquaint yourself with the pension fund’s rules, which are an integral part of the supplementary voluntary pension accumulation agreement.
A participant of a fund can choose from among the following ways for receiving pension disbursements: a lump-sum pay-out (a one-time pension disbursement), partial periodic payments (conversion at regular intervals of a portion of fund units in the pension account into cash to be paid out), or the purchase of an annuity from an insurance company that provides life insurance (read more about annuities at: www.lb.lt/pensiju_anuitetas).
All the information provided is of a promotional nature and cannot be construed as a recommendation, offer or invitation to accumulate money in pension funds operated by INVL Asset Management UAB. The information provided here cannot be the basis for any subsequently concluded agreement. Although this information of a promotional nature is based on sources considered to be reliable, INVL Asset Management UAB shall not be responsible for inaccuracies or changes in the information, or for losses that may arise when investments are based on this information.