Too often than not residents in Latvia do not follow their pension, because in most cases the word pension is something they associate with the far future. Additionally, people sometimes do not understand how their pension is calculated. In reality, however, it is all simple – the future pension «grows» little by little every day. The pension amount depends on two main indexes: residents’ paid tax amount and how much the saved up money is able to earn residents in the future.
Part of Latvian residents’ pension (second pension level included) is invested into shares and securities, which allows for staying ahead of the inflation and provide capital increase and notably bigger pension in a long-term perspective. Finance Latvia Association board chairperson Sanita Bajāre explains why it is important to start thinking about future pension early and what the most important decisions each individual needs to make, because neither the state nor the pension’s manager can make them on their behalf.
«The first decision is picking a pension manager that will be in charge of the 2nd pension level’s saved up capital (which receives 6% of our wages). There are seven pension managers active in Latvia with 28 different deposit plans – active, balanced and conservatives. This is where we reach the next intersection – the future pension amount depends on how risky or cautious the deposit strategy is. Unfortunately, nowadays people rarely study the pension-related topics: only about 10% of all future pensioners look up information about 2nd level pension capital on Latvija.lv portal. On Manapensija.lv the percentage of these people is about 3%,» stresses Bajāre.
Read also: Rapid inflation may force early pension indexation in Latvia
«The stereotype of information about pensions being complicated and hard to understand often deters people from studying their pension savings and related topics. This is why at the beginning of March Latvia’s government approved the proposal to make this information more accessible and comprehensive from 2024 onward. This is a very significant step that will help keep people informed about their pension savings using their internet banking account or other sites that use secure user authorization tools (if the user agrees). This means people will be able to follow the dynamic of their pension in a more convenient manner. This will also let them make timely decisions to increase their future pension. For example, pension managers now offer age-specific pension plans to people. But most people are not aware of these options – their money stays in their default plan,» adds the association’s board chairperson.
According to her, «there is another novelty that was unveiled this year. While previously the practice was that all the residents who did not pick an individual pension plan were assigned by default to conservative plans, now the State Social Insurance Agency plans to include these people to one of Active 50% plans. This means half of 2nd pension level’s savings will be invested into shares of growing companies, which is an appropriate approach for younger residents. A look back on returns of different past deposit strategies, long-term-wise, shows that the best approach is taking bigger risks early on and earning more in return, then gradually reducing risks to ‘stabilize’ income. For 2nd level pension, this would mean 100% investments into shares in the first decade of active work life, later switching to 50% investments into shares. By the time the person reaches pension age, the pension plan will have switched to a more conservative plan. Estimates show that this approach helps more than double pension capital when compared to a single, conservative pension plan.»
Participants of the 2nd level pension plan now have the option to leave their pension savings as inheritance. This can be done very easily – residents need to find their pension contract in their internet bank and pick one of three options: add the saved up pension amount to a specific person’s 2nd level pension amount, leave pension savings as inheritance in accordance with the Civil Law or have the pension added to the state special budget for pensions.
«There is also one nuance to keep in mind – from 1 July 2022 onward the state will perform social contributions to the pension capital of parents during their child care period. This is a novelty that was not previously used in Latvia. This means if parents take a break from work to take care of their children, their pension contribution volume will not reduce,» stresses the expert.
By the end of 2021 the 2nd pension level’s savings had reached EUR 6 billion, which is 18% more when compared to the end of 2020. The considerable increase come not from the increase in the number of people that have opened up pension accounts (there was a drop last year), but an increase of the size of contributions (+36%) and a better average contribution amount. The economy gradually recovering from Covid-19 pandemic is also a factor. This is especially true for average returns of active plans, which provided average returns of 12.3%.
«The war in Ukraine, inflation and slower economic growth will have an effect on pension level returns. This is where it is important to keep in mind that we save up pensions over a course of decades. The economy shows positive development over the course of such time. This also benefits deposits, as they stay ahead of inflation. This is why it is important for people to not be afraid of moments of crises but depend on the experience of pension managers on financial markets. Our shared goal is providing the biggest possible return from invested capital and balance it with a safe deposit strategy. Each pension plan participant needs to make timely decisions so that financial professionals can do the rest. The government is responsible for developing and maintaining a sustainable pension system the public can trust and rely on. Its stability is important in the context of national security,» said Bajāre.