2nd pillar pension funds

Did you know that:

  • the average state social insurance (SODRA) pension in Lithuania for those who contributed for the required period of time as of October 2018 was just 337.48 euros;
  • diverse studies have shown that maintaining one’s pre-retirement quality of life in old age requires having retirement income that is 60 to 85 per cent of one’s pre-retirement income;
  • the size of pensions paid by SODRA depends on the ratio of employed persons to pensioners as well as on the economic situation, so currently employed people’s influence on their future pension may be quite limited. The state, seeking to enable people in the country to save more for retirement, starting in 2019 is implementing a 2nd pillar pension fund reform which encourages more people in Lithuania to engage in accumulating in these funds;

To increase retirement income, additional accumulation in 2nd and 3rd pillar pension funds is recommended.

Accumulation in the 2nd pillar before 2019

Until now, accumulation in 2nd pillar pension funds could be maximal or minimal, and some people had halted accumulation in 2013.

Those accumulating maximally had pension contributions from three sources: a contribution from the taxes paid to SODRA, a supplementary contribution from the wage of the person accumulating, and the state’s incentive contribution, the size of which was based on the average wage the year before last. This form of accumulation was also called 2 + 2 + 2. People who began accumulating in 2nd pillar pension funds after 2013 did so maximally.

The contributions to a 2nd pillar pension fund of a participant who was accumulating minimally were transferred only from the taxes paid to SODRA. This form of accumulation was also called 2 + 0 + 0. It was also possible to halt accumulation, with new contributions no longer transferred to the pension accumulation account, though the previously accumulated amount was left in the 2nd pillar pension funds and further invested.

Pension reform of 2019

As of 2019, a new pension accumulation reform is taking effect, including changes for accumulating in 2nd pillar pension funds.

After changes to the taxes paid by the employer and employees, in most cases (depending on one’s income) continuing to accumulate in a 2nd pillar pension fund will be financially beneficial. Due to the changes in the tax system, when continuing to accumulate a person’s net wage will either increase or remain the same, even if maximal instead of minimal accumulation is chosen.

Thus people who are employed will be able to allocate more money to accumulation in pension funds and so make arrangements for their future.

Key changes

  • The formula for 2nd pillar pension accumulation in pension funds is changing. As of 2023, all 2nd pillar participants will accumulate according to the formula “3+1.5%” (a contribution by the participant of 3 per cent of their gross wage plus a contribution by the state of 1.5 per cent of the average wage in the country the year before last). In 2019, the state’s incentive contribution for maximal accumulation will be 16.41 euros per month. Those who until now accumulated maximally will move to the new formula as of 2019 automatically, while those who accumulated minimally will transition to the new formula gradually over several years unless they choose to make the change immediately.
  • The state social insurance pension will no longer be reduced when accumulating in 2nd pillar funds as of 2019.
  • 2nd pillar pension funds will operate on a life-cycle basis. Lithuania’s pension accumulation companies will establish life-cycle funds by 20 December 2018: each company will have 7 funds which will be divided up according to participants’ year of birth and will themselves gradually change their level of risk, and also 1 so-called “payout” fund in which people who have already retired will hold their accumulated assets.
  • Life-cycle pension funds will themselves change their level of risk in accord with participants’ age, so people will not have to worry about that. All those who until now accumulated in the 2nd pillar, unless they choose otherwise, will accumulate in the pension fund that is most appropriate for them based on their age and recommended risk level.
  • The management fee for pension funds will gradually shrink by half: as of 2021 it will fall by as much as half to just 0.5 per cent.
  • Accumulation “holidays” will be allowed, at various moments, the total of which over the entire period of accumulation can be up to 1 year.
  • Depending on the amount accumulated in a fund and the manner of disbursement you choose upon retiring, some or all of the accumulated assets may be inheritable, and as of 2020 annuity payments services will be provided by SODRA.

Read more about the 2019 reform here.

Benefits of 2nd pillar pension accumulation

  • Investment in the future: At retirement, you’ll get pension income from two sources – the State Social Insurance Fund (SODRA) and the 2nd pillar pension fund.
  • Convenience: You don’t have to worry about transferring money to your pension fund account, since SODRA will take care of that. Moreover, the money in your pension fund account will be invested during the whole period of accumulation, even if you stop making contributions (if you lose your job, get sick or for some other reason). When you again start working and receiving insured income, the SODRA contributions will once more be transferred to your 2nd pillar pension fund.
  • It’s yours: Depending on the amount accumulated and the manner of disbursement you choose upon retiring, some or all of the accumulated assets may be inheritable.
  • The state contributes too: Starting 1 January 2019, for one parent in a household who is receiving a childcare allowance and raising a child under 3, a pension fund contribution equal to 1.5 per cent of the average wage in the country the year before last will be transferred from the state budget. Pension contributions are made for each child under 3.

How to withdraw money from a 2nd pillar pension fund

  • You can withdraw the assets accumulated in a pension fund when you reach the pension age established by law or acquire the right to an early pension.
  • Pensions can be paid out in a one-time lump sum, in periodic instalments, or by acquiring a pension annuity from a life insurance company. Starting in 2020, new pension disbursement procedures will take effect, offering the choice of a standard or deferred annuity, with SODRA as the payer in both cases.
  • Based on the currently valid table for base pension annuity size, which follows rules established by the Bank of Lithuania, there is an obligation to acquire a pension annuity for a man of pension age (63 years and 8 months) when the accumulated sum is 16,524 euros, and for a woman of pension age (62 years and 4 months) when sum is 17,107 euros. More information about pension disbursements prior to 2020 is available here.
  • In 2020, updated procedures for pension distributions will take effect: employed persons who reach retirement age and have accumulated the amount stipulated by law in their 2nd pillar pension fund will be required to buy an annuity. Depending on the amount accumulated in the 2nd pillar pension fund, these manners of withdrawing funds will apply:
    • If less than 3,000 euros is accumulated, a lump-sum payout shall be made.
    • If 3,000 to 10,000 euros is accumulated, payouts shall be made in periodic instalments until no money is left.
    • If 10,000 to 60,000 euros is accumulated, a pension annuity shall be purchased and payments shall be made until death. Two types of annuities shall be available:
      • A standard annuity (pension payments starting immediately on purchase of the annuity and continuing for life, paid by SODRA in addition to the age-old pension paid by the state);
      • A deferred annuity (payments from the time of retirement until age 85 paid out of the private pension fund, for that allocating 85-90 per cent of the amount accumulated in the fund and with that amount being inheritable; and payments from the age of 85 paid by SODRA, for that purpose allocating 10-15 per cent of the amount accumulated in the 2nd pillar pension fund, but without those payments being inheritable).
    • If more than 60,000 euros is accumulated, the portion of the assets which exceeds that amount may be paid out as a lump-sum pension distribution, and the remaining portion shall be paid out until death through the purchase of an annuity.

What those concluding a new agreement should know

  • Pension funds’ money is invested in accord with a pension fund investment strategy approved by the Bank of Lithuania.
  • As a pension fund participant, you will have to pay the fees specified in the rules for the relevant pension fund. When accumulating in 2nd pillar pension funds, an asset management fee applies and pension fund assets may be used to cover currency exchange costs.
  • For participants of the 2nd pillar pension accumulation system prior to 2019, the state social insurance pension will be reduced proportionately as established by law. Starting in 2019, accumulation in a 2nd pillar pension fund will not influence the SODRA pension.
  • A 2nd pillar pension accumulation agreement cannot be terminated except in the case of a first-time agreement, which the participant may unilaterally terminate within 30 calendar days of the agreement’s initiation by informing the pension accumulation company about that in writing.
  • When accumulating in pension funds, the investment risk is borne by the pension fund participant – the pension accumulation company does not guarantee the profitability of investments. The past results of a pension fund are not a guarantee of future results and are not a reliable indicator of future results. Since the value of a pension fund can both increase and decrease, you may recover less than you invested. More information about the risks associated with pension fund investing can be found here.
  • When seven or fewer years remain before retirement, we suggest considering investing in a conservative investment pension fund.
  • You can find more information about pension accumulation at www.kiek.lt; www.sodra.lt; and www.lb.lt.

Once they have received a first contribution to their pension accumulation account, participants can change their pension accumulation company.

INVL 2nd pillar pension funds prior to 2019

We recommend choosing pension funds that correspond to your age. In 2019, new pension funds base on the life-cycle principle will begin to operate. Those accumulating in these funds until now will be transferred to the new funds in keeping with their age.

What is your age?
Age 16–46 Age 47–52 Age 53–57 Age 58 or older

Are you 16-46 years old?
We recommend choosing pension funds which allocate up to 100 per cent of investments to equity. Share prices sometimes fluctuate and that can cause losses over the short term. Such changes reflect these funds’ greater short-term volatility, but in the long term the investments are usually profitable.

Are you 47-52 years old?
We recommend choosing pension funds which allocate up to 50 per cent of investments to equity markets and the rest to bonds and time deposits. The value of these funds changes less over the short term, with fluctuations that reflect lower volatility, but they also earn smaller returns than equity funds.

Are you 53-57 years old?
We recommend choosing pension funds which allocate up to 30 per cent of investments to equity markets and the rest to bonds and time deposits.

Are you 58 or older?
We recommend choosing pension funds which invest 100 per cent of their resources in securities with the lowest risk – bonds and time deposits.

When selecting a pension fund, we recommend making a responsible and careful analysis, closely reading the rules for the pension fund and noting the risks associated with investing.

You can get acquainted with a pension fund’s rules by selecting the fund of interest on the menu bar or by visiting one of INVL Asset Management’s client service centres.

WHY CHOOSE THE PENSION FUNDS WE MANAGE?

We’ve been managing pension funds ever since the first ones were established in Lithuania in 2004. The experience we’ve built up in the process allows us to offer clients a professional approach. We’re convinced that what’s made the expansion of our pension fund activity so successful is above all the attention we give to the needs of each client, along with these strengths:

  • Age-based asset management: We seek to offer the most suitable pension fund by adhering to the life-cycle pension fund concept, dividing up investment risk across the different stages of life.
  • Constant analysis: In an effort to ensure the best risk-return ratio, we constantly analyse changing market conditions and the potential of the most attractive investments.
  • Attention to clients: Four times a year our clients get e-mailed statements regarding the assets accumulated in their pension accounts, and they can review that information on the INVL self-service portal at their convenience.
  • Some of the lowest fees: We’re the only pension fund management company that doesn’t charge a fee for switching a 2nd pillar pension fund to a pension fund at another company. Our fees for administering 2nd pillar pension funds are also among the lowest in the market. The lower the administration fees, the more money goes to your pension savings.
  • Exceptional long-term results: For the most recent 5 year period, INVL’s pension funds were the best performers in most pension fund categories in terms of the return they earned, and for the last 10 years were the best in all categories, excluding life-cycle funds (as per the pension fund results reported by the Bank of Lithuania for three quarters of 2018).

More information

  • If you have questions or want to know more about pension funds, call us at +370 700 55959 or write to us at pensijos@invl.com.
  • You can sign a 2nd pillar pension accumulation agreement electronically.
  • For more information about INVL Asset Management‘s pension fund investing strategies, review our pension fund rules.
  • Here you can find fund reports and reviews.

Useful information and links:

  • Important INVL Asset Management UAB documents.

We remind you that for 2nd pillar pension accumulation participants, the state social insurance old-age pension for the period prior to 31 December 2018 is proportionately reduced as established by law, except for persons participating in pension accumulation prior to 31 December 2018 who between 1 January 2019 and 30 June 2019 exercise the right to terminate pension accumulation and return the accumulated money to SODRA – reduction of the state social insurance age-old pension will not apply to such persons. The SODRA pension will not be reduced for those participating in 2nd pillar pension accumulation as of 2019. The old-age pension is not reduced with regard to the state’s added contribution. A 2nd pillar pension accumulation agreement cannot be terminated except in the case of a first-time agreement, which the participant has the right to terminate unilaterally within 30 calendar days of entering the agreement by informing the pension accumulation company about that in writing. Persons who became participants prior to 31 December 2018 shall have the right from 1 January 2019 to 30 June 2019 to terminate participation in pension accumulation or halt the transfer of pension contributions to a pension fund.

Accumulating in pension funds entails assuming investment risk. The pension accumulation company does not guarantee the profitability of pension funds. The value of a pension fund unit can both rise and fall. You may recover less than you invested. A pension fund’s past investment management results do not guarantee the same kind of results and return in the future. The results of a previous 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 (the INVL STABILO II 58+ Conservative Investment Pension Fund).

Responsible and thorough consideration is called for when choosing a pension fund. You should examine the investment-related risks as well as the applicable deductions, and carefully read the pension fund rules which are an integral part of the pension accumulation agreement.

If the money accumulated in a pension fund exceeds a certain amount, it must be used to purchase a pension annuity – a contract to receive periodic pension payments as long as you live. A pension annuity is mandatory when the basic pension annuity size calculated for a pension fund participant is at least half the size of the state social insurance basic pension (currently 152.92 euros, half of which is 76.46 euros). Pension annuity payments will be made to you by the life insurance company with whom you conclude an annuity contract. Your accumulated amount will be transferred to the account of that company, which in turn will commit to make annuity payments of an agreed size for the rest of your life. Whether any amount that has not yet been distributed at your death can be inherited depends on the type of annuity you choose. You can learn more about pension annuities here.

All the information presented is of a promotional nature and cannot be construed as a recommendation, offer or invitation to accumulate savings in pension funds managed by INVL Asset Management. The information provided here cannot be the basis for any subsequently concluded agreement. Although this information of a promotional nature is based on sources which are considered to be reliable, INVL Asset Management is not responsible for inaccuracies or changes in the information, or for losses that may arise when investments are based on this information.