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In the end of November the Parliament (Saeima) accepted the amendments in the Law on State Funded Pensions in the second reading. Member of the Board of Luminor Latvia Pensions Ilja Arefjevs points out that these amendments may be justifiably considered as the most essential during the last years: “We can definitely say that as of the next year the II Pillar pension will become more attractive to our customers, more progressive and at the same time it will ensure bigger individual independence – the proportion of commission fees will be considerably reduced, there will be more options to invest in company shares and the administrators will not be allowed to use any benefits to attract customers to II Pillar pension plan.”
Investments in company shares will be possible for up to 75%
Until now Latvia had the most conservative II Pillar pension plan in the Baltics, however as of 2018 we expect positive changes – it will be possible to form new II Pillar pension plans, which will allow making investments in company shares for up to 75% from one’s funds instead of previous 50%. Already now in Lithuania the maximum of permitted investments in company shares may reach 100%, in Estonia – up to 75%.
Investments in company shares play the central role in increasing the capital in long-term. On one hand the value of the company shares may have bigger fluctuations and that is why they are justifiably considered to be more risky investments. However, on the other hand, over the ten and more years the fluctuations of the price of the shares usually have an upward tendency, which considerably increases the average profitability of these investments.
Administration commissions will be considerably reduced
The amendments provide for the decrease of administration commission fees in two phases – in 2018 there will be the first reduction of commission fees and in 2019 the final structure of commission fees will become effective. The constant part of the commission fees will not exceed 0.6% per year, if the total II Pillar pension funds under the administrations do not exceed 300 million euro and not more than 0.4% per year for that part of the assets, which exceeds 300 million (in comparison with the current 1% per year in all plans). With the increase of total amount of assets in II Pillar pension, the average constant commissions in the nearest years may be expected under 0.5% per year, which is twice less than currently.
The variable part of the commission fees will also be substantially changed. First, it will be considerably reduced and will not exceed 0.5-0.7% per year for plans with investments in shares and 0.25-0.45% per year for plans without investments in company shares (in comparison to the current 1% and 0.5% respectively).
Second, there will be changes also in the conditions for receiving the variable part. It is planned that the interbank rate EURIBOR, which is currently used in the calculation of excess profit, will be replaced with a combination of indices of the company shares and governmental and companies’ bonds. It means that the variable commission will be paid only from the excess profit. Moreover, 80% of the excess profit will remain on the customers’ accounts, while the administrators will receive additional remuneration in the amount of 20% from the excess profit only for outstanding performance within the general framework of commission fees.
Further on it will not be allowed to offer prizes or link to other products and services to attract customers
As of the next year the application procedure for the II Pillar pension plans will be considerably changed. It will be possible only via Internetbank, using the governmental portal latvija.lv; it will not be possible to apply or change the II Pillar pension plans at the branch offices of the banks. Importantly, that the administrators will no longer be allowed to offer material and non-material benefits to their customers for the participation in a specific II Pillar pension plan, for example, they will not be allowed to organize lotteries or offer gift cards. Likewise, it will no longer be allowed to link the participation in any specific II Pillar Pension plan with other products and services. In general these changes will ensure more considered and more independent choice of the II Pillar pension plan by the customers.
Inheritance of the II Pillar pensions in Latvia – not only possible, but necessary
Lately the discussions on the positive and negative aspects of the inheritance of the II Pillar pensions become more and more topical. The majority of parliamentarians supported the amendments to the law already in the first reading, which would allow inheriting the funds saved up in II Pillar pension plan. For the time being these amendments to the Law on the State Funded Pensions have not yet been approved in the second reading as they require an extended research.
Both in Estonia and Lithuania the capital from II Pillar pension may be inherited. To speak the truth, in both countries there might be situation that a small part from the II Pillar pension capital is formed by the instalments made by the person him/herself (from gross salary). But it is also worth mentioning that the inheritance refers to all of the II Pillar pension capital and not just a part of instalments.
In Latvia, just like in Estonia, 20% of the gross salary is channelled for financing the I and II Pillar pensions, that is why there arise a valid question – why Latvian inhabitants are less socially protected having paid their taxes than their neighbours in Estonia? In Lithuania the amount, which is channelled for financing the pensions is bigger than in Latvian and Estonia – 26.3%. That is why there is some basis to consider that implementation of possibility to inherit II Pillar pension in Latvia is not only possible, but also necessary and it does not necessarily mean compulsory increase of the social tax.